Freeport McMoRan Copper (
) may have to bear the brunt of a mineral exports ban that
Indonesia is planning to put in place beginning January 2014. From
January, mining companies are required to first process the mined
ore within Indonesia before exporting it. Freeport currently gets
most of its processing done at international smelters outside
Freeport is the biggest miner in Indonesia and operates the
massive Grasberg copper and gold mines. Grasberg is the world's
second largest copper mine. The company may have to cut its exports
to about 40% of current levels and lay off a large portion of its
workforce if the ban comes into effect. The Indonesian government's
move isn't a bolt out of the blue though. It had been legislated
quite a while back but mining companies have been hoping to somehow
evade it. Hectic parleys and discussions are still going on
according to Freeport, but as late as last week there had been no
change in the government's stance. It is to be noted that a
reduction in exports will impact the government's own revenues as
it will no longer receive royalties on the ore not exported.
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What Is The Export Ban All About?
A mining law enacted in 2009 prohibits export of unprocessed
minerals from Indonesia after January 12, 2014. The purpose is
to increase the value of commodity exports and encourage
development of the local processing industry. As late as last week,
the parliament reaffirmed its support for the law.
The problem for mining companies like Freeport is that there is
a shortage of smelters in Indonesia even if they were ready to
process all of their ore before exporting them. In addition,
Freeport says that it ships its minerals under long-term
contracts to international smelters and wishes to honor these
contracts. It says that it entered into these contracts in the
first place because its initial agreement with the Indonesian
government allowed it to export concentrates without placing any
restrictions. However, the company has displayed its willingness to
study the viability of constructing additional smelting capacity in
the country. The problem is that any such additional capacity can't
come up in such a short time. ((
Indonesia trying to skirt its own ban on mineral
Newmont Mining, another major copper producer, currently smelts
less than a quarter of its ore in Indonesia and has warned that it
may have to halt operations at its Batu Hijau mine.
What Is The Expected Impact Of Enforcing The
Apart from being a large producer of copper, Indonesia is
also the biggest producer of nickel, the top shipper of tin
and the leading supplier of bauxite to China. The export ban will
thus have a tremendously negative impact on the country's
Currently, Indonesia is struggling to cut a large current
account deficit. As a result of the high deficit, confidence in its
currency is being undermined which has been Asia's weakest
performing this year after falling around 20% relative to the U.S.
dollar. Any cut in exports will results in bigger deficits and a
further weakening of the currency. A weak currency makes imports
costlier which in turn fuels inflation and angers the population.
So far, the authorities have been deliberately slowing growth in an
attempt to cut imports and the current account deficit but a
reduction in exports may cause the deficit to widen to unmanageable
If the ban stands in its present form, Freeport is expected to
face a loss in revenue of around $5 billion next year. This amounts
to 65% of its total revenue in Indonesia. Right now, it
processes about 40% of its output at a smelter in Java while the
rest is exported. Therefore, the company's output at the Grasberg
mine will fall by 60% after the ban, with the production of copper
reducing by 900 million pounds and that of gold by 1.7 million
ounces. It would also have to layoff half of its 15,000 employees
in Indonesia, which may cause worker unrest and pose further
problems for the government. Financially, the country will lose
$1.6 billion in taxes, royalties and dividends, which translates to
a reduction of 0.6% in its GDP growth rate. According to the
country's central bank, the GDP growth rate is expected to be 6%
next year if the ban is not enforced.
According to Nomura, Indonesia could lose as much as $400
million a month in export revenue. This would have a substantial
impact on its trade deficit of $700 million a month.
What Is The Government's Stand?
Given the adverse ramifications of enforcing a ban, the
government is understandably keen to resolve this tricky situation
without being accused of breaking the law. Last week, lawmakers
rejected the government's effort to water down the ban by allowing
mining companies to export unprocessed ore if they were able to
show they were building smelters or were prepared to pay higher
The government can now try to find a way around the law by
adjusting the regulation that determines minimum purity thresholds
for processing. According to the Indonesian Mining Association, the
law only states that companies must process and refine their
products domestically. Right now, there is a huge discrepancy
between the minimum processing threshold for copper (99.9%)
and nickel pig iron (6%) set out in a government regulation, which
is outside the purview of the parliament. This can be changed
through a ministerial decree without requiring the parliament's
approval or breaking the law.
We will have to see how events play out over the next few weeks
because it's not clear how far the government would be willing to
go in the matter. Any attempts to tweak regulations to make it
business as usual for mining companies may be seen as violating the
spirit of the law. At the same time, the government will find it
difficult to ignore pressure from the mining industry which has
warned that barring a few players, the sector will not survive in
the country after the ban.
In case the ban does go through in its present format,
Freeport's revenues will suffer phenomenally. In 2012, the company
reported total revenues of $18 billion. Despite expectations of
higher revenues this year on account of the oil and gas business, a
loss of $5 billion would be a huge setback.
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