INSIGHT

Indonesia implements export ban on ore

Asia Energy Resources

In brief

In a move intended to add value for Indonesia by requiring that the processing and refining of mineral commodities be conducted there, the Government has issued new regulations implementing in-country processing requirements for mineral commodities (excluding coal), including a ban on the export of unprocessed ore. Partner David Holme and Senior Associates Brooke Van Gils and Made Satwika report.

Background

The Indonesian Government (through the Ministry of Energy and Mineral Resources (MEMR)) has issued Regulation No. 1 of 2014 (MEMR 1/2014) to implement the in-country processing requirements under Government Regulation No. 23 of 2010 on the Implementation of Coal and Mineral Mining Business Activities, which have also been amended by Government Regulation 1 of 2014 (GR 23/2010) and Indonesia's Law No. 4 of 2009 on Minerals and Coal Mining (the Mining Law).

Under the Mining Law and GR 23/2010, holders of mining business permits (IUPs) and special mining business permits (IUPKs) for production operation and contracts of work (COWs) are required to add value for Indonesia by conducting in-country processing and refining. The Mining Law and GR 23/2010 require in-country processing and/or refining of minerals within five years of the effectiveness of such law (ie by 12 January 2014)and therefore bans the export of ore after that date.

The new regulations are designed to implement the in-country processing requirements following the expiry of this five-year transition period.

Key features of the new regulations

  • All mineral commodities (including metal minerals, non-metal minerals and rock/stone, but excluding coal) must be processed and/or refined in-country, according to the minimum processing and/or refining limits set out in MEMR 1/2014, before export.
  • Nickel, bauxite, tin, gold, silver and chromium must be fully refined in-country, according to the minimum refining limits set out in MEMR 1/2014, before export.
  • The holders of COWs and production operation IUPs may, for a period of not more than three years from the issuance of MEMR 1/2014 (ie until 12 January 2017), continue to export:
    • semi-processed metal minerals in the form of: copper, iron, ilmenite, titanium, lead, zinc and manganese concentrates (provided the relevant minimum limits for the processing of such concentrates set out in the regulation are satisfied); and
    • copper by-products in the form of: anode sludge and copper telluride (provided that further refinement of such products in-country cannot yet be undertaken).
  • The right to export such semi-processed minerals and copper by-products is dependent upon the COW or IUP holder obtaining a recommendation from the Director General in the MEMR's name. Each recommendation is valid for a period of six months. In order to obtain such a recommendation, the COW or IUP holder must, in the case of export of semi-processed minerals, demonstrate:
    • that it has sufficient funds to undertake processing and refining in-country using its own facilities or based on a cooperation with another party;
    • its seriousness to develop refining facilities directly or in cooperation with another party with a plan for the development of such facilities; and
    • good environmental management performance.

    For the export of copper by-products, only the latter two criteria must be satisfied in order to obtain a recommendation.

    The Ministry of Finance has also issued a new regulation, Regulation No. 6/PMK.011 of 2014, which imposes export taxes on the export of copper, iron, ilmenite, titanium, manganese, lead and zinc concentrates. This regulation is designed to disincentivise COW and IUP holders from exporting semi-processed products. Export taxes are imposed progressively, commencing at a rate of 20 per cent (25 per cent for copper concentrate) in 2014 and increasing to 60 per cent by 2016.

    How it affects you

    The new regulations ban the export of unprocessed ore, and provide only a limited ability to export semi-processed minerals (subject to the payment of export taxes), which is expected to benefit mainly the major copper producers, such as Freeport-McMoRan Copper and Gold and Newmont Mining Corporation. This limited exception was, at least in part, clearly designed to avoid the huge losses to state revenues that would have resulted from banning the export of concentrates by these producers. The regulation will obviously present a serious challenge for other producers that are already in, or approaching, the production phase, and do not yet have, or have access to, processing and refining facilities.

    The development of processing and refining facilities in Indonesia will be critical. Although 66 companies have reportedly committed to the building of Indonesian smelting facilities, only eight have completed those facilities, with a further 25 reported to be in the final stages. It has also been reported that another 112 are conducting feasibility studies to build smelters. Accordingly, while, in the short term, the regulations present serious challenges for the mining industry, it is hoped that, in the longer term, they will also present opportunities for further investment in and cooperation with the development of processing and refining facilities in Indonesia.