Indonesia Imposes New Taxes on Metal Exports

May 8, 2011, 1:11 pm | Admin

Original Article from The New York Times: http://www.nytimes.com/2012/05/05/business/global/indonesia-imposes-new-taxes-on-metal-exports.html?_r=2

 

Indonesia Imposes New Taxes on Metal Exports

New Indonesian taxes on metals and curbs on the shipment of raw minerals may curtail exports of the materials to China, highlighting concerns over the effects of the policy on the Indonesian economy.

With the new rules, which take effect Sunday, Jakarta hopes to increase investment in domestic ore processing to increase exports of higher-value finished metals.

Indonesia, rich in resources, is imposing a tax of 20 percent on some metal ore exports and will prohibit shipments of raw minerals unless miners submit plans to build smelters.

The rules are likely to affect less than a third of Indonesia’s metal exports but are a precursor to a total ban on exports of raw materials.

About 10,000 holders of mining business permits, mostly small-scale miners in the country, will be required to produce plans for how they will process and smelt ore in Indonesia before the ban takes effect or face a ban on exporting that will begin Sunday. Indonesia is among the world’s top nickel miners and tin producers.

Traders said China’s imports from Indonesia of some of the metals, including certain nickel ores, might fall sharply after May, forcing producers in China who rely on the ores as raw materials to cut production as prices of those commodities rise.

Indonesia supplied about 80 percent of China’s nickel and 53 percent of its bauxite last year, according to PricewaterhouseCoopers.

Most major miners in Indonesia, like Freeport-McMoran Copper & Gold, Vale Indonesia and Aneka Tambang, or Antam, hold contractual agreements, some of which have lasted decades, that they believe protect them against new rules.

But Indonesian officials said Friday that while holders of such agreements would be exempt from the new tax, the government also wanted to try to renegotiate these long-term contracts.

The decision made Thursday brings to an end months of uncertainty for the Indonesian mining industry, which has been unsettled by a series of new regulations this year as the country has sought to derive more revenue from the sector.

The duty will be applied to nickel, tin, gold, copper, silver, lead, zinc, chromium, platinum, bauxite, iron ore and manganese. Coal will be ruled upon separately, said the mining minister, Jero Wacik, leaving open the possibility of a future tax on coal exports.

Indonesia has already imposed similar duties on exports of palm oil and cocoa beans, reducing exports of both and driving investment in domestic processing over the past year to produce higher-value products like margarine and chocolate.

Currently, there are no export taxes on metal ores, said an executive at the state nickel and gold miner Antam, though some miners must pay royalty charges in the single digits.

Indonesia has already banned exports of raw tin, leaving small-scale producers of nickel and bauxite as the most likely to be affected. Indonesia accounted for 15 percent of the world’s bauxite production and 14 percent of nickel mine output last year.

While the tax and export curbs have been discussed in recent months and were widely expected in some form, analysts and miners said the two-year time frame for building domestic smelters and the size of the new tax would hurt the industry.

“The government wants to kill a mouse in a rice field, but they’re burning the whole field,” said Tjahyono Imawan, president of the Indonesian Mining Services Association.

Two major credit ratings agencies recently rated Indonesia investment-grade status in recognition of strong growth and falling debt, though Standard & Poor’s held its rating one notch below investment grade last month, noting the possibility of new mining regulations.

Many small miners have been given mining permits by the local authorities under Indonesia’s decentralized government system, and some may halt exports altogether, rather than pay the tax or submit plans to build a smelter.

Much of that ore is shipped to China, often under the radar of central government officials.

Government officials have said small miners needed to team with larger companies investing in smelters to avoid the 2014 ban, and have said the government will provide incentives, like tax allowances and tax holidays.

“This places the government in an advantageous position to demand concessions from miners in return for permission to export,” according to Concord Consulting, a risk consulting firm in Jakarta.

The government has said it will negotiate all contracts with miners, including royalties and a recent rule requiring foreign miners to divest at least half their assets after 10 years of production — a change seen as part of a growing trend of global resource nationalism.

Companies with longstanding contractual agreements, like Freeport and Newmont, account for 70 percent of mining output and exports. With the new regulations, that could rise to 80 or 90 percent, the Indonesian Mining Association said.

“This policy is good for Indonesia because the government will be able to control the small and medium miners which are so far not friendly to the environment,” said Syahrir Abubakar, executive director of the association.

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