Freeport Indonesia May Resume Exports Soon but Dispute Continues
Reportedly, the government of Indonesia will hand Freeport Indonesia a temporary export permit for copper concentrate shipments, hence being able to bypass (for the moment) Indonesia's controversial ban on mineral ore exports. Freeport Indonesia, the local unit of US mining giant Freeport McMoRan, has been unable to export copper concentrate for the past three months, thus missing out on about USD $1 billion in revenue. Due to the drop in exports, mining activities at the Grasberg mine in Papua fell drastically, giving rise to concern about layoffs.
The root of all problems between the Indonesian government and Freeport Indonesia is Law No. 4/2009 on Mineral and Coal Mining (New Mining Law) that introduced a protectionist approach in Indonesia's mining industry. This new law includes various terms that breach the long-standing contracts of work that had been signed between local miners and the Indonesian government years - or even decades - before. The main issues that originate from the New Mining Law are disagreement about new (and higher) taxes, royalties, divestment rules, and the need to establish local processing facilities (in the case of Freeport Indonesia, the building of a second smelter).
Part of the New Mining Law is the ban on exports of mineral ore. Through this export ban Indonesian authorities encourage local miners to process their mining output domestically first in order to deliver export products with added-value. This approach aims at reducing Indonesia's risky reliance on exports of raw commodities (hence being dependent on volatile commodity prices) and increasing returns from the mining industry.
Although in recent years, Freeport Indonesia seemed willing to respect the government's new rules, relations between both sides changed in January 2017 when the government made it very hard for Freeport Indonesia to resume export concentrate exports. The miner had to turn its contract of work into a special mining license (IUPK) in order to be allowed to get new temporary export permits. Freeport Indonesia resisted as this IUPK contains various terms and conditions that are negative for the miner (including the requirement to pay higher taxes and royalties, as well as to divest a stake up to 51 percent). Instead, Freeport Indonesia demands the same fiscal and legal guarantees that were included in its 30-year contract of work.
Freeport Indonesia threatened to seek international arbitration over the matter if the Indonesian government would not change its view, while several government officials subsequently threatened Freeport Indonesia's existing contract to operate the Grasberg mine (that expires in 2021) would not be extended.
Read more: Mining Dispute Indonesia: Arbitration for Freeport & Government?
Over the past couple of days the tone has shifted again. Teguh Pamuji, Indonesian Secretary General for the Energy and Mineral Resources Ministry, announced earlier this week that Freeport Indonesia would be handed a six-month IUPK which allows the miner to resume copper concentrate exports temporarily, while discussions between both sides on the longer-term issues continue (finalizing agreements on matters that include investment stability, divestment and domestic smelting). Pamuji added that the miner needs to remain committed to building a second processing plant (smelter) and pay an export duty if it accepts the temporary export permit.
Freeport Indonesia needs the export permit from the Indonesian Trade Ministry in order to be able to export up to 1.1 million tons of copper concentrate. Earlier, it already received a necessary recommendation from Indonesia's Energy and Mineral Resource Ministry. Resuming exports is vital for Freeport as for each month exports are banned, output at the Grasberg mine (the world's second-largest copper mine) is reduced by 70 million pounds of copper.
Regarding the development of a second smelter, Freeport Indonesia earmarked 100 hectares of land on the Java Integrated Industrial and Port Estate (JIIPE) in Gresik (East Java), where its other smelter is located as well (PT Gresik). This industrial park is integrated with a 499-hectare seaport and a 800-hectare housing estate.
Over the past five days shares of Freeport McMoRan on Wall Street surged 6.56 percent on the news that its local Indonesian unit may resume copper concentrate exports soon. Freeport Indonesia accounts for about 18 percent of Freeport McMoRan's total revenues. However, there remain plenty of differences between Freeport and the Indonesian government and therefore talks about a structural solution may require many more months.