Early Effects Of Indonesia's Ore Export Ban

The unpredictable regulatory environment in the Indonesian mining sector is again surfacing as a major issue for domestic and international mining companies operating in Indonesia. Senior figures in Indonesia's minerals and energy ministry have recently indicated that metal ore and concentrate exports have ground to a halt since the imposition of the ban on ore shipments on January 12. While initially tabled as a blanket ban designed to bolster the long-term domestic profitability of Indonesia's mining industry, last-minute regulatory changes diluted the ban to allow some industries to continue exporting unprocessed mineral ore. The reprieve was extended to copper, manganese, iron ore, lead, and zinc concentrates, and it lowered the minimum processing requirements prior to export. According to Energy and Mines Minister Jero Wacik, 66 companies are allowed to continue to export because they have satisfied government officials that investment in local smelters is imminent. However, considerable uncertainty remains regarding the future operations of the country's hundreds of bauxite and nickel miners, all of which require refinement prior to export.

Regulatory Background

The history of this regulation can be traced back to 2009. Previously, contracts of works ("CoWs") between the Indonesian government and a particular mining company lasted for a period of 30 years. In 2009, CoWs were replaced by mining business licenses (or Izin Usaha Pertambangan ("IUP")) that cover exploration and production. While CoWs entered into prior to 2009 are to be honored, albeit with some renegotiation of terms, new licenses or renewals of CoWs are to be as IUPs. In contrast to CoWs, IUPs are subject to changes in fiscal policy and to reforms of the mining regulatory code. In February 2012, the government announced further regulatory changes. First, that majority or wholly foreign-owned companies must surrender 51 percent of their shares to an "Indonesian participant" after 10 years. The Indonesian government was to have the right of first refusal, followed by state governments and the Indonesian private sector. Many investors voiced concerns that 10 years was insufficient time to recoup the costs, let alone make an adequate return because of the capital-intensive nature of mining projects. Some argued that the regulatory change amounted to a mandatory divestment of equity. The second announcement in February 2012 concerned the ban on the export of raw materials...