Indonesia possesses a wealth of mineral resources. Compared to the world’s total reserves, the country is ranked first for nickel, second for tin, fifth for gold, sixth for bauxite, sixth for coal and seventh for copper. It is home to thousands of mining companies practicing world-class safety and environmental standards, has an abundance of cost-effective labor and, more recently, has implemented competitive tax-incentives for mining companies engaged in establishing a downstream industry for the extracted raw materials.
This wealth of mineral resources is reflected the sector’s contribution towards the nation’s economy. The mining sector contributed 4.71 percent in 2017 and was the second-largest contributor to national exports in that same year at 14 percent (US$168.8 billion), right after industrial exports. And although mining no longer contributes as large a share to exports, GDP, revenue and employment as it once did, the sector continues to possess strong strategic national importance and plays a dominant role in some areas of the country in terms of wealth distribution.
By that same token, Indonesia’s mining industry is among its most heavily regulated. The country’s main mining regulation is Law No. 4/2009 on Mineral and Coal Mining, which regulates mining licenses, mandates foreign shareholder divestment, as well as government and community involvement in the mining operation. As is the practice with Indonesian bureaucracy, a number of implementing regulations have been issued to clarify and amend the law, such as Government Regulation No. 18/2018 and Energy and Mineral Resource Minister Decree No. 1935 K/30/MEM/2018, which essentially give the government the authority to determine a special selling price for coal that is supplied specifically for the fulfillment of domestic needs. The sector also sees cross-sector regulatory barriers, such as Ministry of Trade Decree No. 82/2017, which requires coal exporters to use Indonesian-owned sea transportation companies and use insurance from Indonesian-owned insurance companies.
It is no wonder that, according to the Canada-based think tank Frasier Institute, Indonesia’s mining sector is often viewed as among the least-attractive jurisdictions for investment based on the Policy Perception Index (PPI), dropping 3 ranks to 69th place out of 77 jurisdictions despite an increase in its PPI points in the Fraser Institute’s 2020 Survey of Mining Companies. Some of the main issues include “disputed land claims”, “protected areas”, and “regulatory duplication and inconsistencies”.
Nevertheless, Indonesia’s mining sector is not one to be ignored. In terms of policy, according to the World Bank, despite the perceived policy barriers, licensing processes are open and transparent to the public. The process to appeal decisions made by mining authorities, OHS, and overall mining tax administration are consistently implemented. SOEs’ financial management, public financial management, and revenue sharing have been carried out in accordance with existing regulations. Regulations on human rights, gender, and mine closure have also been well implemented.
In terms of production, Indonesia is a key player in the global industry, supplying over a quarter of the world’s supply for some raw materials. The country is currently focused on developing the downstream industry for the various raw minerals that are being extracted from its earths, while balancing its interest with that of mining companies. Rather than a barrier, this should be viewed as an opportunity for companies who are looking to tap into Indonesia’s highly potential mining sector.
||Reserves (in tons)
||Share of global production (in %)
Indonesia has some of the world’s largest mineral reserves and is a key player in the industry.
Source: United States Geological Survey (2020), Indonesian Ministry of Energy and Mineral Resources (2020)
Indonesia’s Mineral Downstream Progress
The initiation of Mining Law No. 4/2009 has led to the slow but steady increase in the development of mineral refining facilities. A considerable uptick is expected by 2024 with the operationality of 35 new mineral refining facilities.
Source: Indonesian Ministry of Energy and Mineral Resources (2020)
Source: Fraser Institute Survey of Mining Companies 2020
Since the enactment of Mining Law No. 4/2009 in January 2009, the Indonesian government has struggled to balance the interest of the state and the interest of investors and mining companies. Over the past decade Indonesia continues to issue new implementing regulations to the law with provisions such as carrying out value-adding proceeds to be repatriated back to Indonesia and for foreign investors to divest majority control of their mining operations.
Some policies that investors should be aware are:
- Indonesia has a coal “benchmark pricing system”, which refers to a reference price set by the Indonesian government based on the average of a number of international and Indoneisan published coal indices. Sales contract are required to refer to this benchmark price.
- Indonesia also has a “domestic market obligation” in relation to coal sales. At the time of writing, the Ministry of Energy and Mineral Resources requires mining companies to satisfy a minimum coal domestic market obligation of 25% of their total production.
- In 2012, the Indonesian government banned the export of mineral. Since then, temporary exports of certain concentrates are allowed based on a case-by-case basis. This is linked to the country’s development of its mineral downstream industry.
It should be noted that these practices are common among other mineral-rich jurisdictions in the world with underdeveloped downstream industries. As things currently stands, the vast majority of implementing regulations in Indonesia have been issued and the focus has now shifted towards enacting the implementing regulations. How Indonesia’s mining sector will develop will depend on how these policies are carried out.
Mining is a capital-intensive endeavor and requires years of operations before it can become profitable. This is why mining companies consistently ranks Indonesia high for its mineral resources, but ranks it low for its regulatory barriers. Fortunately, the regulatory uncertainty may finally have eased since the enactment of Law No. 4/2009 with the current government looking more perceptive towards the demands of investors.
This is reflected in the enactment of Mining Law No. 3/2020 on the amendment to Law No. 4/2009 on Mineral and Coal Mining, which provides more long-term certainty not only for holders of Coal Contract of Work, but also for Contract of Work and Mining Business Permit Holders. Another significant reform in Indonesia’s regulatory regime is the issuance of Law No. 11/2020 on Job Creation or Omnibus Law. Some 51 implementing regulations to the Omnibus Law, which include 0% royalty to mining companies that participates in the development of Indonesia’s mineral refinery industries, have been issued that should further improve the general investment climate for mining sector.
The most pressing topic currently is the global economic recovery in regards to the COVID-19 pandemic. In this case, Indonesia is showing that it is keeping pace with the rest of the world on vaccination and in restarting its economic growth engines. This is important as many of the world’s major mineral importers, such as China, are also looking to jump start their economies. Recently, Indonesian coal miners signed a Memorandum of Understanding with the China Coal Transportation and Distribution Association to enhance coal exports.
Meanwhile, the Indonesian government is also making a concentrated push towards becoming a production hub for Electric Vehicle batteries. This strategy, which owes both to Indonesia’s massive reserves of Nickel and its developing downstream capacity, has gained quite the traction after the recent signing a US$9.8 billion deal with South-Korean conglomerate LG to produce EV batteries in Indonesia, as well as the recent establishment of the Indonesia Battery Corporation under a joint venture between four major Indonesian State-Owned Companies.
Overall, the mining sector in Indonesia can be a regulatory headache but the potential of the country’s mineral reserves simply cannot be ignored. Foreign Mining companies and investors looking to tap into the country’s wealth can be successful so long as they are willing to put the time and effort to understand the market.