Mineral Ore Export Ban Affects Production Rates of Freeport Indonesia

Freeport, which operates the world's fifth largest copper mine in Indonesia, put copper concentrate exports on hold since 12 January 2014 when Indonesia's mineral ore export ban came into effect. Through this ban, the Indonesian government aims to boost domestic processing facilities in order to earn more value-added revenue from its natural resources. This new policy is often labeled 'resource nationalism' because it aims to reduce foreign presence in the country's natural resources as there is a popular belief that foreign companies profit too much from Indonesia's resources. However, shortly before implementation, a last-minute revision to the ban implied that some concentrate exports are allowed but subject to a heavy export duty up to 2017 when the ban will come in full force. Freeport still refuses to pay new taxes as it is not in line with original agreements. Other renegotiations between the government and Freeport involve higher royalties, divestment of shares and the establishment of processing facilities (smelters). All these issues are still topic of debate between both parties.

The government of Indonesia requests a royalty fee of 10 percent, while Freeport is only prepared to pay 4 percent for copper, 3.75 percent for gold and 3.25 percent for silver. The government also wants Freeport to divest 51 percent of its shares in accordance with the new law, while Freeport is only prepared to divest 20 percent. Other large mining companies that are still in negotiation with the government are Newmont Nusa Tenggara and Vale Indonesia.

Currently, Freeport McMoRan holds 81.28 percent of Freeport Indonesia's shares directly and - indirectly - another 9.36 percent through Indocopper Investama. The remaining 9.36 percent is held by the Indonesian government.

The new and controversial mining law has caused considerable confusion in the mining sector of Indonesia. Although the Indonesian government expects that the new mining law will lead to value-added exports in the long-term, many stakeholders and other institutions are skeptic. The World Bank presented a rather negative assessment of the law in the March 2014 edition of its Indonesia Economic Quarterly, claiming that it will hurt trade, limits government revenue and undermines (already) weak investor confidence in Indonesia's mining sector. Moreover, it sees no positive results in other countries where a similar ban has been imposed. Lastly, the ban will burden the country's already fragile trade balance due to the loss of export revenue, while imports rise as capital goods need to be imported to build smelters.

The global copper price has fallen significantly amid weak economic data from China, which consumes 40 percent of the world’s annual copper production.

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