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Indonesia to Relax 2014 Ore Ban to Allow Smelter Projects

Indonesia, preparing to ban raw-metal ore shipments from 2014 while compelling mining companies to build smelters, will probably allow some exports beyond that deadline to give more time for processing plants to be built.

“There will be some room,” Deputy Energy and Mineral Resources Minister Rudi Rubiandini said in an interview in Jakarta. “It won’t be fully enforced in 2014 as it won’t be fair to the companies,” he said, declining to be more specific.

The leeway may allow producers such as Phoenix-based Freeport-McMoRan Copper & Gold Inc. more time to oversee the billions of dollars in investments needed to build the capacity in Asia’s largest copper producer after China. As many as 30 smelters may be built to process nickel, bauxite and iron ore, out of 185 proposals received by the ministry, said Rubiandini.

While “we’re bound by the law,” the ministerial regulation was issued only this year, Rubiandini said yesterday. He was referring to the rule on shipments that was issued in February and became effective from May. That’s more than three years after the nation’s 2009 Mining Law was passed, and left only about two years before the 2014 ban was to come into force.

“This is in line with our view of a pragmatic application” of the 2009 law, Xavier Jean, Singapore-based associate director of corporate ratings at Standard & Poor’s, said in an e-mail today. “The number of 30 projects that could be built still looks quite optimistic. Although all of these projects might be economically feasible, I would suspect a number of them would be relatively smaller-scale projects.”

Commodity Shipments

Southeast Asia’s largest economy, where mining accounted for 12 percent of gross domestic product last year, is striving to boost the value of commodity shipments to support growth. The country may surpass Germany and the U.K. by 2030 to be the world’s seventh-largest economy, generating $1.8 trillion in annual sales for agriculture, consumer and energy companies by that year, McKinsey & Co. said in a report this week.

The smelters will be clustered in four regions near sources of so-called primary energy to cut costs, said Rubiandini, who was a deputy at energy regulator BPMigas before taking up his current post in June. They are Halmahera Island, Balikpapan in East Kalimantan, South Sulawesi and East Java, Rubiandini said.

“We can supply gas from Tangguh LNG plant for the smelters in Halmahera, from Sengkang for Sulawesi and Bontang for the plants in Balikpapan,” he said, using initials for liquefied natural gas. Smelters can build powers plant or cooperate with state utility PT Perusahaan Listrik Negara, Rubiandini said.

Power Demand

Indonesia may need more than 1 gigawatt of additional electricity to power the smelters, S&P said in July. The Indonesia Chamber of Commerce and Industry puts potential demand at 1.5 gigawatts for at least 40 plants. One gigawatt can supply 769,230 Indonesian households.

“The cluster system would benefit the industry as a whole as it will likely facilitate economies of scale,” Jean said. Still, it creates larger so-called event risk than if projects were scattered as power interruptions would affect the entire cluster and may result in more frequent supply shocks, he said.

Indonesia banned exports of 32 types of unprocessed metals, waiving the restriction for companies operating under so-called mining business licenses that are planning to build local refineries. Those shipments are subject to a 20 percent tax.

PT Freeport Indonesia, the unit of Freeport-McMoRan that runs the Grasberg copper mine in Papua, is conducting a study on the possibility of building a smelter, Investor Daily Indonesia said on Sept. 18, citing President Director Rozik B. Soetjipto.

New smelting capacity has been discussed in contract talks with the government, Ramdani Sirait, a spokesman, said today, declining to comment on the Investor Daily report. Freeport already owns 25 percent of a smelter in Gresik, East Java.

“Freeport and partners have built a smelter and we must honor contracts with our buyers,” said Sirait. “But if there are other smelters in Indonesia and they offer competitive prices, it’s possible to supply them also.”

Three-month copper has gained 8.6 percent to $8251.25 a metric ton on the London Metal Exchange this year.

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