Supreme Court verdict
The Supreme Court has upheld an industry challenge to a government ban on the export of unprocessed metal ores. The Indonesian Nickel Association (ANI) and the Association of Indonesian City and Regional Governments brought the case against the application of certain parts of Energy and Mineral Resources Ministry Regulation No. 7 on mineral processing.
Although details of the verdict are not yet public, Energy and Mineral Resources Minister Jero Wacik has been quoted by Reuters1 as saying that Indonesia will review its rules on the export of unprocessed metal ores following this verdict.
Background
The regulations banning the export of 14 unprocessed metal ores came into effect in May this year. The regulations apply to mining companies operating under mining licences known as IUPs, which were issued following the introduction of the 2009 New Mining Law.
Mining companies operating under the old system of Contracts of Work are exempt in the short-term, although are required to provide plans to the government with respect to ultimate "adjustment" of their operations to comply with the restrictions..
The regulations were intended to develop the country's downstream mining industry, increase domestic revenues and ensure availability of refined products for domestic use. However, the regulations brought practical challenges, since Indonesia does not have sufficient smelters to process raw materials nor is it likely to have sufficient capacity by the end of the transition period in 2014. Exports of metal ores have dropped sharply since the ban came into effect.
Implications
In October last year, the President's Energy and Security Policy highlighted the need to change the culture of mining in Indonesia, which emphasises export of raw mining products with little focus on 'value add', as one of three critical issues facing the mining industry. The other two critical issues were excessive foreign influence and 'very unfair' contracts entered into between the Government of Indonesia and foreign investors.
The need to 'value add' was contemplated by the New Mining Law, and the regulations earlier this year on raw ore export bans and, later, the introduction of the 20 per cent tax on the export of 65 commodities were really seen as implementation of this policy. Following industry lobbying, a limited exception until 2014 was introduced, provided that the exporter committed to construct a smelter (among other things).
The impact of the Supreme Court verdict will be on the small and mid-size players, who could not commit to smelters – although it will obviously impact on any larger players who were considering developing smelters, which generally involve a capital cost of more than US$1bn, depending on the mineral.
The regulations banning ore exports do not apply to coal, although the Government has also indicated its intention to ban low-calorific exports from 2014. The Minister of Energy and Mineral Resources has revised the applicable calorific threshold several times, oscillating between 5,100 and 5,700 Kcal/kg (ADB). A 5,700 kcal/kg threshold for 'low calorific value' would place the ban more in the medium rather than the low range.
The Indonesian Coal Mining Association believes that the plan to ban low-calorific coal exports is not viable, even if the technology to upgrade the calorific value of coal is available. Industry concerns aside, the Supreme Court decision on metal ore exports raises doubt as to whether the ban on low CV coal could go ahead.
Footnotes
1Indonesia to review unprocessed metal ore export rules, Tuesday 6 November 2012, Reuters
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
