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17 February, 2017
On 11 January 2017, Indonesia's government issued several new regulations[1] (the “New Regulations”) which amended its position on hotly debated issues like the ban on exports of unprocessed minerals and the divestment obligations of shareholders of mining companies in Indonesia.
In this article we explore the background on some of these regulations and why the New Regulations have such an impact on the mining industry in Indonesia.
Domestic Processing
In 2009, Indonesia passed a Mining Law (Law No. 4 of 2009 on Mineral and Coal Mining) (the "2009 Mining Law") which required minerals to be processed domestically. Further regulations were then passed in 2014[2]which effectively imposed a ban on exports of unprocessed minerals. The objective of the 2009 Mining Law was to (amongst others) incentivise local miners to build infrastructure to add value to the minerals which they have exploited, thereby creating more jobs and enhancing national growth.
Under the 2014 MEMR Regulations, miners were required to refine minerals like nickel, bauxite, tin, gold, silver and chromium to high minimum purity requirements before they could be exported. For example, nickel had to be refined to a purity level of 70% and bauxite to a purity level of 98-99%. As the minimum purity requirements were high, the regulations meant that miners (which did not have access to smelters) had to invest in and develop infrastructure to refine the minerals before they could be exported.
In contrast under the same regulations, the minimum purity requirements of minerals such as copper, iron ore, manganese, lead, zinc, ilmenite and titanium were kept relatively low. The purity requirement for example for copper was lowered from 99% to 15% under the 2014 MEMR Regulations – meaning that minerals like copper did not require much processing before export. Miners of these minerals fell more easily within the limited exemption which allowed them to continue to export relatively unprocessed minerals for a period of three years until 12 January 2017.
This exemption has benefited large copper mining companies in Indonesia for the last few years. Although as expiration of the exemption approached, these companies were expected to scale back export shipments.
New Regulations
It appears, with the release of the New Regulations, that Indonesia's government has softened its position on its current ban on export of unprocessed minerals.
Under the New Regulations, local miners can apply for permission to export unrefined mineral concentrates provided that they fulfil several conditions, including (amongst others), the requirement to convert their existing Contract of Work[3] into a Special Mining Business Permit (Izin Usaha Pertambangan Khusus, or IUPK) and the requirement to seek approval from the Minister of Trade on a yearly basis.
This may seem to be a relaxation of the mining ban. However the Indonesian Minister of Energy and Mineral Resources, Ignasius Jonan, signalled his intention to keep to the objective of the 2009 Mining Law by stating that the ministry will only grant a recommendation to miners with IUP or IUPK status if they show progress with the development of local processing facilities. Such permits for export will be reviewed every six months by the Energy Ministry – which has indicated that they will revoke the permit if there is insufficient progress with smelter construction.
Mixed reactions?
The impact of the New Regulations was probably most keenly felt in the nickel smelting industry as the price of nickel has fluctuated since the implementation of the New Regulation.
The New Regulations may negatively affect companies which have invested heavily in nickel smelters subsequent to the introduction of the 2009 Mining Laws. On the flip side, the new rules will benefit nickel miners that have large stockpiles of nickel that have not been processed.
Tougher on foreign divestment policy
Separately, Indonesia has also strengthened its foreign divestment policy for the mining sector. Previously there was a requirement on companies who are IUP[4] or IUPK holders with foreign shareholders to divest its foreign ownership to 49% by the end of tenth year of production with limited exceptions granted to companies carrying out underground mining[5] or smelting activities[6].
Under the New Regulation, such exemptions have been removed. All foreign investors will now have to relinquish their majority stake in the Indonesian mines they own by the end of the tenth year of production.
The New Regulations also require the divested shares to be offered to Indonesian parties in the following order: (1) the Central Government; (2) the Provincial / Regional Governments; (3) the State-Owned Companies and Regional Owned Companies; (4) private entities. There is also no longer a time limit by which each entity is required to respond to the offer, meaning that any entity especially those with a higher priority can lengthen the divestment process.
Conclusion
With the current volatility in global commodity prices, it seems that Indonesia's government has to keep a balance between the desire to attract more foreign investment and the need to boost infrastructure investment in Indonesia. It can achieve the former by relaxing its current protectionist stance promulgated by the introduction of the 2009 Mining Law, but it will need to be forceful to maintain these regulations to incentivise local miners to develop Indonesia's processing infrastructure and give investors confidence. It is likely that this will not be the last significant update to the mining regulations in Indonesia.
[1] These New Regulations are as follows:
Government Regulation No.1 of 2017 issued on 11 January 2017 which is the fourth amendment to Government Regulation No. 23 of 2010 (the principal implementing regulation of the Indonesian Mining Law).
Regulation of the Minister of Energy and Mineral Resources Number 5 of 2017 on Increasing Added Value Through Domestic Processing and Refining of Minerals.
Regulation of the Minister of Energy and Mineral Resources Number 6 of 2017 on Procedures and Requirements to Obtain Recommendations for Export Sale of Mineral Resulting from Processing and Refining.
[2] In January 2014, four main regulations effected the export ban (the "2014 Regulations"), namely:
Government Regulation 1 of 2014, which contains broad language imposing the export ban for both Contracts of Work and for IUPs, and stated that further details would be provided in ministerial regulations.
Minister of Energy and Mineral Resources ("MEMR") Regulation 1 of 2014, which sets out the minimum levels to which raw ore must be processed or refined before export (the "2014 MEMR Regulations").
Ministry of Trade Regulation 4 of 2014, which sets out the requirements for a mining company to be a Registered Exporter (backed up by a MEMR Circular Letter dated 13 February 2014 setting out the requirements for obtaining a recommendation for the award of exporter status).
Ministry of Finance Regulation 6 of 2014, which sets out a progressive export tax for minerals.
[3] Previously foreign investors could only act as operators of mining projects unless they happened to hold one of a strictly limited number of no longer issued 'Contracts of Work' ('Kontrak Karya', 'KK'), or a 'Coal Contracts of Work' ('Perjanjian Karya Pengusahaan Pertambangan Batubara', 'PKP2B') that were originally intended for large scale mining projects.
[4] Mining Business Permit (Izin Usaha Pertambangan, abbreviated IUP).
[5] Foreign investors were previously entitled to hold up to 70% of the shares of such companies.
[6] Foreign investors were previously entitled to hold up to 60% of the shares of such companies.
For further information, please contact:
Ratih Nawangsari, Partner, Ashurst
ratih.nawangsari@oentoengsuria.com
