BMI View: Recent changes to Indonesia ' s mining code have no doubt reduce d the overall level of attractiveness for investment in the country. While there is a possibility for further reforms, especially in the run up to the 2014 general election, we believe the worst is behind us and do not expect significant policy changes in the near term. Indeed, a moderation in the government's stance is highly possible as metal prices continue to head broadly lower over the coming quarters , weighing on profits for mining companies.
In line with our expectations, the Indonesian government is looking to increase export royalty payments by mining companies to 10% in ren egotiated deals as the country seeks to boost state revenue from the growing mineral sector. President Susilo Bambang Yudhoyono has been actively embarking on a series of measures to reform the US$93bn mineral sector in a plan to propel the G20 country into a global top-10 economy by 2025.
|Upping The Ante|
|Indonesia - Mining Industry Value & Growth|
Digging Its Own Grave?
T he recent changes in Indonesia ' s mining code have made the country a less attractive place for investment with the implementation of stricter regulations weighing on miners ' profits and posing significant hurdles to project development. For one, the Indonesian government is restricting exports of unprocessed metal by imposing a 20% duty on 14 mineral ore exports, in a bid to encourage local mining companies to build their own smelting plants ahead of the 2014 export ban on unprocessed metal. The recent wave of new mining regulations has impacted small miners in particular, resulting in mine closures and lay-of fs in regions such as Sulawesi I sland, with some companies resorting to bribing central government officials in order to continue exporting .
Indeed, the most pronounced impact has been on Chinese imports of nickel ore from Indonesia, having experienced consecutive months of steep falls following the export tax deadline on May 6. In June, China ' s imports of nickel ore from Indonesia plunged by more than 50% from the previous month to reach 2.0mnt, while imports from the Philippines experienced a surge of 54% during the same period. We believe the trend of China ' s growing reliance on the Philippines for nickel ore imports will continue to persist over the coming quarters as exports from Indonesia become increasingly threatened.
|Shifting To The Philippines|
|China - Nickel Ore Imports (kt)|
Whilst these developments of greater resource nationalism appear alarming, it must be seen within the context of rising state intervention across the world. Indeed, governments are looking at increasing their control of mining projects or raising taxes in Mongolia, Guinea, South Africa, much of Latin America and Australia. Therefore, whilst Indonesia has gone further than most in increasing control, it is not without precedent.
Drastic Changes Unlikely In Near Term
W e believe the worst is behind us and we do not expect further significant policy changes to take place in the near term. While rhetoric against foreign miners could step up, we believe a moderation in the government's stance is more likely to happen owing to two reasons. Our below consensus forecasts for base metals prices does not bode well for domestic miners in Indonesia. We forecast metal prices to head broadly lower over the course of 2012 and 2013 and believe the government may reconsider measures in a period of lower prices and profits for mining sectors. The paramount importance of the mining sector, which constitutes 12% of Indonesia's GDP, further reinforces our conviction that policies that would jeopardise growth in the mineral sector will not be implemented.
|Firmly Below Consensus|
|Select Commodities - BMI 2013 Average Price Forecasts vs Bloomberg Consensus, % Difference|
Moreover, practical considerations could prompt the Indonesian government to delay the 2014 deadline for the ban on unfinished mineral exports. We note that the implementation of a raw material export ban will most likely be fraught with difficulties as Indonesia is still very much in the early stages of being able to refine all of its mineral production. This is particularly true for nickel and bauxite exports, of which less than 10% is currently processed. The country does not have sufficient smelters to process raw materials and the construction of these smelters is very time-consuming and capital intensive. To highlight, PT Newmont Nusa Tenggaru (NNT), a subsidiary of the United-States-based Newmont Corporation, has stated that it would be economically unfeasible for the company to build its own smelting plant to process its gold and copper concentrates as required by the Indonesian government. Instead, NTT, which operates a large copper and gold mine in West Nusa Tenggara (NTB), prefers to collaborate with other companies when it comes to processing ores and concentrates.
|A Long Way To Go|
|Indonesia - % Of Mineral Output Refined Domestically (2011)|
Infrastructure Development Held Back By Subsidy Quagmire
While we remain generally optimistic on Indonesia's mining sector, we acknowledge that the historical under-investment in infrastructure will continue to hamper growth in future project development, presenting a significant barrier to an otherwise promising economic machine. Although the government has made clear its intention to pursue faster infrastructure development, it plans to allocate IDR193.8trn to capital spending (or just 2.1% of GDP) on overall capital spending in 2013 versus a far more substantial IDR274.7trn on energy subsidies (an increase of 18% over its 2012 forecast). Moreover, the government's support of infrastructure development continues to be hamstrung by the country's heavy reliance on energy subsidies. In order for the government to both ramp up infrastructure spending and maintain a prudent fiscal balance, it will need to tackle the issue of subsidy reform sooner rather than later. However, we believe that the likelihood of this occurring continues to diminish as 2014's presidential elections draw nearer, especially given the rising tide of populist policies among the top candidates.