Economic Impact of the Indonesian Mineral Law

sparing Impact of the Indonesian mineral LawAbstractRaw mineral ores is one of excellence natural product in Indonesia. For many socio-economic classs, the mineral archeological site companion in Indonesia so-and-so export raw mineral ores now over the world. A raw excavation right potencys the mining ships conjunction to process the ores domestic helpally then export its product. The presidential term purpose is to increase respect added of the mineral ores and creates domestic industry activity. The problem arises since there are only few smelters which ready to process the mineral ores. In short run, this new police has a negative impact to mineral export activity and gross domestic product growth get down slower.1 IntroductionIndonesia is one of rich countries with abundant mineral imaginativeness. Bauxite, copper, gold, atomic number 28 and tin are Indonesias excellence mineral resource export product. This mineral ores are spread over in Indonesia region, mos tly in Kalimantan Island, Papua Island, Sumatra Island and Sulawesi Island.The latest report of U.S. Geological Survey (USGS) mentions the estimation of bauxite controls in Indonesia is 1,000,000 metric ton, ranked Indonesia in 6th of biggest bauxite reserves in the world. Meanwhile the reserve of Indonesias copper is 28,000 metric ton, the 8th largest in the world. Gold reserve is 3,000 metric ton, placed in 5th largest reserves in the world. Other Indonesia resources, nickel and tin are estimated 3,900,000 and 800,000 metric ton reserved beneath the earth. Indonesias nickel is 6th largest deposit and tin reserve ranked this country at second position in the world (USGS, 2014). go through 1.Production per year its reserves (bauxite, nickel, tin) (source USGS, 2014)Figure 2.Production per year its reserves (copper, gold) (source USGS, 2014)These generous resources are being used by Indonesian government to add national income by export the mineral ores to foreign country. Since 1 967, Indonesian government attracts foreign company to apparel in mining sector. To regulate the Foreign Direct Investment (FDI) in mining sector, the government had been issued several mining law which has revised over the time. Since then, the mining sector is become favorite among foreign investor (Bhasin Venkataramany, 2007).These mining activities contribute to Indonesias Gross Domestic Product (GDP). Together with oil gas and quarrying, mining sector accounted with 7% in real GDP at 2012 (at everlasting prices). Even though this sector does not contribute more in contrary with an some other(prenominal) natural resource e.g. agriculture, livestock, forestry and fishery with 12% contribution in GDP, mineral sector still contribute USD 61.3 billion in Indonesias total GDP of USD 875.72 billionFigure 3. Indonesia GDP 2012 at constant prices (source Central Bureau of Statistics)2 Indonesia New dig Law aft(prenominal) spending almost four years word in the House of Representa tives, on 16th December of 2008 the parliament members agreed a new mining law, replacing old mining law which had been utilise almost 40 years. This new mining law officially signed by the president on January 2009 and the law is known as Law No.4/2009 Concerning Mineral and Coal Mining (Syahrir, Bongaerts, Drebenstedt, 2013).The governments purpose to implement this new mining law is not only regulates the contract term for foreign investor company and obligate them to flummox a mining license, but as well better environment and increasing added value of mineral resources (Syahrir et al., 2013).In order to protect the environment area which affected by mining operation, the new mining law also regulate the mining company to keep the environment and ensure them to gather the minimum requirement of environmental standard operational based on their level of license. Beside the environment purpose, the new law also regulates the company to undertake domestic processing. The Law no.4/ 2009, Chapter XIII, article 102 and 103 statedArticle 102The holders of Mining business enterprise License (IUP) and Special Mining Business License (IUPK) shall increase the added value of mineral and/or coal resources in carrying out mining, processing and purification activities as hale as in making use mineral and coal.Article 103The holders of Mining Business License (IUP) and Special Mining Business License (IUPK) for operational production shall process and purify output of the domestic mining.The holders of IUP and IUPK as referred to in paragraph (1) can process and purify the mining output from others holders of IUP and IUPK.Further provisions on the need to increase the added value as referred to in Article 102 as well as on the processing and purification as referred to in paragraph (2) are to be provided for in government regulation.Furthermore, the Ministry of Energy and Mineral Resource (MoEMR) also issued a regulation no.34/2009 in order to control production and export of mining product. This is reflected from article 5 MoEMR no.34/2009 which statedThe Mining Company as cited in Article 3 paragraph (1) shall be allowed to export the mineral or coal as long as it is capable of fulfilling a Minimal per centum of Mineral Sale or Minimal Percentage of Coal Sale.This policy issued as government want to ensure the supply for increasing domestic demand. With this Ministry Regulation, the company may export their production, but is encouraged to fulfill domestic demand which calculated by Domestic Market Obligation (DMO) (PricewaterhouseCoopers, 2012).Despite this new mining law was signed on five years ago in 2009 the effect will be enforced on 12 January 2014. Therefore, after 12 January 2014 the mining company cannot export mineral unprocessed. This situation is totally different when in the old mining rules regime1, the mining company still allowed to shipping the mineral ores directly to their purchaser industrial countries, such as Ch ina, Japan, EU countries and United States.At that time the mineral ores are exported and then processed by the buyer in order to add the value of ores product. Later, Indonesias industry sector will import the metal product to supply their production (Syahrir et al., 2013). For example Indonesia shipyard industries have to import steel from China where the Chinas steel plant produced steel from Indonesias iron ores.Based on this situation, the idea of adding value to mineral resource in Indonesia came to surface. And later the President of Indonesia Republic signed it as the new mining law. This law and regulation will close the mining companys curtain to export the mineral resources directly to the buyer unless the mineral is processed domestically.3 The Lack Preparation of Mineral Refinery SectorAfter the new law has been signed on December 2009, the mineral resources have to be processed or extracted in domestic smelter or extractor. In the other hand there are only three availa ble mining refinery in Indonesia by 2012 PT Aneka Tambang, PT Indonesia Asahan Aluminium and PT Smelting (Hogan Lovells, 2012). After another regulation MoEMR reg. no.7/2012 come into force to mandate the mining companies to increasing the value through mineral processing, some mining company are intended to invest smelter in Indonesia which are PT Vale Indonesia, PT Freeport Indonesia, PT Newmont Nusa Tenggara, PT Weda Bay Nickel, PT Jogja Magasa Iron and PT Agincourt Resources.Those mining companies should build mining refinery in order to comply the law even though they are facing uncertainty condition to build a smelter caused by surrealistic deadlines and unclear concept of adjure of Work (CoW) (McBeth, 2014).Indonesias inconsistence policy and high risk investment made the companies considering build a smelter are diminish (Jensen Burton, 2014). This unprepared mineral refinery industry to anticipate the new mining law is being unhealthy to Indonesian mining sector as thei r ore cannot be shipped.Fortunately, the government already received several refinery plant proposals coming from domestic investor and foreign investor. However only three are expected to start the project this year with takes at least 5 years to complete (Jensen Burton, 2014).4 The Effect of Mineral LawAs mentioned above, there is some increasing amount of mineral ores in mining companies stock pile as it cannot be shipped over the world. After the new mining law has been applied, the export activity especially in mining sector is decrease which can be shown by following figureFigure 4.Export of Mineral Ores (source Ministry of Trade)The figures describing the export of mineral ores especially tin, copper, nickel and aluminum. After the new law has been signed, the mining companies start to boost the production in order to add extra revenue before they could not export the ores unprocessed.When the MoEMR no.7/2012 released to mandate them to increasing mineral value added, they s tart to slow down the production as they cannot export directly to their buyer.Table 1.GDP growth tracely at constant price (source Central Bureau of Statistics)This condition also affecting Indonesias GDP growth as the mineral trade also contribute to Indonesia GDP as shown in previous table. From nine sectors of GDP endorser, only mining and quarry sector which decrease consecutively in 1st quarter and 2nd quarter of 2014. Throughout the first quarter of this year, the value-added mining and quarrying decreased about 0.38% when compared with last year in the same quarter. If calculated based on constant 2000 prices, the value added produced by the sector in the first quarter of 2014 was only Rp 48.2 trillion. The figure is lower than the first quarter of 2013 amounted to Rp 48.4 trillion and fourth quarter 2013 amounted to Rp 50 trillion (Central Bureau of Statistics, 2014).However, in the trade, export of coal only US $ 5.63 billion, down 13.29% compared to the first quarter of 2013 amounted to US $ 6.49 billion. In fact, coal became the biggest contributor to non-oil exports. So that the growth of exports to the first quarter of 2014 GDP is minus 0.78% (Central Bureau of Statistics, 2014)5 ConclusionIn the short run, the result of new mining law is negative to mining trade activity and to national income growth. In the long run after the smelter built, the mining sector will increase once more and the domestic industry also growth since the mineral ores should be processed domestically. As the result, in the long term this law will lead great national income growth.Literature ReferencesBhasin, B., Venkataramany, S. (2007). Mining Law and Policy Replacing the Contract of Work System in Indonesia Mining Law and Policy Replacing the Contract of Work System in Indonesia, 116.Central Bureau of Statistics. (2014). Pertumbuhan Ekonomi Indonesia Triwulan II-2014, (63).Gandataruna, K., Haymon, K. (2011). A Dream Denied? Mining Legislation and The Constitut ion in Indonesia. Bulletin of Indonesian Economic Studies, 47(2), 221231. doi10.1080/00074918.2011.585951Hogan Lovells. (2012). Investment in Indonesia s Mineral Refining and Processing Sector Value-added Regulations and Industrial Policy, (July).Jensen, F., Burton, M. (2014). As smelters weigh cost, Indonesias ore export ban may backfire. Retrieved December 11, 2014, from http//www.reuters.com/article/2014/01/27/indonesia-minerals-smelters-idUSL3N0KY20P20140127McBeth, J. (2014). How to kill an industry in Indonesia. Retrieved December 11, 2014, from http//www.atimes.com/atimes/Southeast_Asia/SEA-01-100214.htmlPricewaterhouseCoopers. (2012). Mining in Indonesia Investment and Taxation Guide, 4th Editio(April).Syahrir, R., Bongaerts, J. C., Drebenstedt, C. (2013). The Future of Indonesian Mining Activities after the Implementation of Law Number 4 of 2009 Concerning Mineral and Coal Mining ( The New Mining Law ). IMRE Journal, 7(4).USGS. (2014). Mineral Commodity Summaries 2014.1 T he mining precursor law no.11/1967 used over than 40 years in Indonesia mining industry. At that time, the mining company which most of them is foreign investor act as asseverator under government and tied with Contract of Work (CoW) agreement (Gandataruna Haymon, 2011)