ARIF SIREGAR Chairman of the Indonesian Mining Association and President of PT INCO

JEFFREY MULYONO Chairman of the Indonesian Coal Mining Association

Tapping to the tune of rock and coal
The third-largest producer of coal in the world has estimated reserves of 12 million tons

The latest global industry reports for mining relate to 2005, a year which saw increased investor confidence, upward trends in commodities prices, and market capitalisation growth. During this year Indonesia, as reported in a PricewaterhouseCoopers survey commissioned by the Indonesian Mining Association (IMA) and the Indonesian Coal Mining Association (ICMA), saw profits in the already established mining sector continue to rise. A marked decrease, however, was registered in levels of new investment when compared to mining investment in the rest of South East Asia, the Americas, Africa and traditional politically low-risk regions such as Australia and Canada.

The main reason for this lack of investor confidence is ascribed to the changes in regulations for the industry arising after 1998, says Arif Siregar, chairman of the IMA and president of PT INCO, one of the world’s premier producers of nickel. “Prior to 1998, mining in Indonesia was easy; it was supported both by the government and the communities. Investors were only required to report to the mining department of the Ministry of Energy and Mineral Resources. Today, there are an increasing number of stakeholders that need to be looked after,” he explains. These include - in addition to the forestry department, local communities, and NGOs - regional and local governments, who, under regional autonomy legislation passed in 1999 and enacted in 2001, were given greater control over mining activities in their areas and were therefore entitled to a larger percentage of royalties revenues gained from these.

Despite all these issues complicating investment in the sector, in 2006 it contributed $2.3billion to government revenue. “The average return on mining last year was about 38.1 per cent,” says Dr Siregar. “What does that tell you? It means that even though there are many problems, these can be solved; and then returns could easily increase above the current figure.”

There are high hopes that a proposed mining bill, currently before parliament, will help attract further investment. Although it has been stalled for several years now, the minister of energy and mineral resources has said that it will be passed soon, and that under its new clauses foreign investment will receive equal treatment. He has also said that the new law will allow for larger contracts to be signed with the central goverment, thus avoiding difficulties that have discouraged investors over the past six years in having to deal with regional governments. In effect, once passed, the law should have a significant impact on foreign investment flowing into the sector.

Dr Raden Sukhyar, assistant to the minister on information and communication in the energy and mineral resources ministry, adds, “The investment climate is getting better. The government has shown a strong commitment to solving the problems faced by investors.”

Attitudes regarding corporate responsibility in the sector have also changed, with companies taking into account issues of local employment and training for the future as well as environmental concerns. The IMA, which comprises all the country’s mining industry producers, continues to act as the link between the government and the sector, helping to promote trust and tackling the problems besetting the industry.

Indonesia is one of the world’s leading coal producers, ranking third after Australia and China. The country’s estimated coal reserve deposit had been held at 5.22 billion tons, but using a new database application system developed jointly by the ministry of energy and mineral resources and a Japanese R&D management organisation, these figures have been amended to 12 billion tons. Total resources also show promising data of 65.4 billion tons. The ministry is confident that the role of coal in Indonesia will continue to increase and believes its share of the national energy mix could be higher than 33 per cent by 2025.

“Our production has been increasing tremendously since the 1990s, going from around 10 million tons per annum to 193 million tons per annum in 2006. This year we expect to produce about 215 million tons,” says Dr Jeffrey Mulyono, chairman of the ICMA.
The main priority for the future of coal production is to ensure domestic demand is satisfied before over-committing to exports. “Regulations must redirect industry players towards more appropriate concerns for our country,” asserts Dr Mulyono. One proposal is to allocate low-rank coal to the domestic market. Coal production sharing for the government (CPSG) is about 13.5 per cent, leaving the remainder for the company. The ICMA has proposed that the figure be reviewed and brought down to 7 per cent, allowing long-term contracts to arise between producers and buyers and increasing confidence in energy supply at home.

Dr Mulyono credits foreign investment with kick-starting the Indonesian coal industry in the 80s and 90s. “Without having foreign companies conducting exploration and producing coal, I don’t think Indonesian firms would have had the confidence to invest in the sector,” he remarks.