----- Original Message -----
From: Gold Anti-Trust Action Committee
To: [EMAIL PROTECTED]
Sent: Tuesday, February 06, 2007 7:13 PM
Subject: [GATA] Commodity supplies in doubt as developing countries can't
settle mining law
Commodity supplies in doubt as developing countries can't settle mining
law
Submitted by cpowell on 05:13PM ET Tuesday, February 6, 2007. Section: Daily
Dispatches
Indonesian Mining Stalls
Disputes Over Control
Halt Development Steps,
Pressure Commodities
By Tom Wright and Patrick Barta
The Wall Street Journal
Wednesday, February 7, 2007
JAKARTA, Indonesia -- Indonesia has some of the world's largest reserves of
gold, coal, nickel, and other valuable commodities, many of which have seen
their prices soar in recent years. Yet mining companies haven't broken ground
on a single large new mine here since Asia's 1997-98 financial crisis.
The reason: a fight between national and local authorities for control of the
country's natural resources. That battle, part of a wider struggle for local
autonomy in Indonesia, could have important implications for global mining
companies and world commodity prices in the years ahead.
Indonesia isn't the only country that's struggling to get mining projects on
track. Other promising mining centers, including Mongolia and the Democratic
Republic of Congo, are confronting similar debates over who should benefit from
resources.
Whether these countries can get new ventures under way will be crucial in
determining if commodity prices remain high for several more years or continue
slipping as some have in recent months. Copper, for instance, is down more than
25% over the past six months, in part because of expectations of weaker global
economic growth, though its price remains high by historical standards.
Opening more of Indonesia's major deposits could add significant new commodity
supplies to the world market, especially for in-demand raw materials such as
nickel and coal. Rio Tinto Ltd., for instance, wants to build a $1 billion
nickel mine on Sulawesi island, and estimates output could reach 46,000 metric
tons a year. A large development like that could help reduce pressures at a
time when nickel is near record prices. But the development remains on hold as
Indonesia tries to resolve its regulatory problems.
Mining has been one of Indonesia's top industries for foreign investment, and
the windfall from selling rights and taxing profits on new mines would be a
badly needed economic boost -- if the country can just determine who gets the
proceeds.
For more than 30 years, there was little to debate. Indonesia's authoritarian
former leader, President Suharto, kept a tight grip on mining, selecting
foreign investors and setting royalties and taxation regimes by decree.
Investors such as Freeport-McMoRan Copper & Gold Inc., a U.S. company that in
the 1970s began operating one of the world's largest gold and copper mines in
Indonesia, enjoyed the certainty of this system.
But after Mr. Suharto was driven from power in 1998 and democracy was
established, local authorities across the 4,800 kilometer-long archipelago of
more than 13,000 islands began to demand a larger share of the wealth generated
by minerals, oil, and gas.
The resulting friction between Jakarta and outlying regions has increased
uncertainty over who is in control, deterring foreign investors. In some areas,
small-scale mining operations mushroomed without central government sanction,
and some provinces levied illegal taxes on mining projects, the central
government says.
The central government has been trying to finalize a new mining law it hopes
will settle such issues. But the process has bogged down amid disputes, many of
them revolving around whether the central government or local governments
closer to the resources should set terms and conditions for mining operations.
Politicians concede the law is now unlikely to be enacted by Parliament before
the end of 2007. The draft law is now before a parliamentary committee, which
has discussed only about a fifth of the bill's 414 provisions since it began
deliberations in January last year.
In the meantime, Indonesia's mining industry "is going nowhere," complains
Priyo Soemarno, executive director of the Indonesian Mining Association, whose
members include Rio Tinto as well as other foreign and Indonesian companies.
"We need somebody strong to say, this is right, this is wrong," to provide
clarity for mining companies. "It has to be done quickly."
As politicians squabble over the law, international mining companies are
keeping potentially large projects on hold. This includes Rio Tinto's nickel
venture. The law could also affect BHP Billiton Ltd., which is considering
developing two new coal mines on the island of Borneo.
The delays mean Indonesia is missing out on a golden opportunity. Mining
companies spent a record $7 billion on exploration globally in 2006, Metals
Economics Group, a Canadian advisory firm, said in a report. Countries such as
Russia and China attracted significantly greater levels of investment than in
previous years, the report said.
By comparison, exploration outlays in Indonesia have dwindled. Before the Asian
financial crisis, local and foreign companies spent an average $40 million each
year on exploration for new mines in Indonesia, according to
PricewaterhouseCoopers. That figure had slumped to $7 million by 2004, a tiny
fraction of the $1.6 billion spent that year on new mine exploration.
Since President Susilo Bambang Yudhoyono took office in 2004, he has tried to
cut Indonesian red tape and attract more foreign money to the resources sector.
He has made some headway, most notably in resolving a prolonged deadlock
between Indonesia's state oil company and Exxon Mobil Corp. to develop the $2
billion Cepu oil field in Java.
But mining executives and analysts say Mr. Yudhoyono's efforts are being
undermined in Indonesia's convoluted bureaucracy, a problem compounded by the
unresolved power struggles between Jakarta and local governments. "There is a
disconnect between what the leadership wants and what others want," says Alex
Gorbansky, managing director of Frontier Strategy Group, a Cambridge,
Massachusetts, advisory firm.
The draft version of Indonesia's new law would give provincial authorities the
right in some instances to issue licenses directly to foreign investors and
oversee mining projects.
Indonesia's Energy Ministry, which drew up the draft, says the law is in line
with legislation passed in 1999 that devolved more political and economic clout
to the provinces to reverse the steady accumulation of power in Jakarta during
the Suharto era.
But critics, including some big foreign and local mining companies, fear giving
power to local officials who lack expertise in regulating mining and have
little knowledge of international commodity markets will make the system
unworkable.
Leaving decisions to local governments would also give more power to
Indonesia's expanding cadre of domestic mining companies, foreign and local
miners complain.
Charlie Lenegan, a managing director at Rio Tinto, which began talks with the
government in 2005 about the Sulawesi nickel project, says the tug-of-war
between local and central authorities has created problems.
Rio Tinto, he says, has faced various tax requests from different layers of
government, making it difficult to assess the overall costs of the project. The
Anglo-Australian company would like to see a new draft law that allows large,
foreign investments to establish individual, long-term contracts that settle
outstanding issues related to a mine in a single document.
"We're saying to the government of Indonesia, you have to look at taxes as a
whole package, not from multiple sources," Mr. Lenegan says.
The debate over who should control resources isn't the sole obstacle to foreign
miners seeking unfettered access in Indonesia. In the case of Rio Tinto, the
Forestry Ministry has declined to provide anything more than short-term permits
for work in protected forest areas. The Energy Ministry says Rio Tinto should
get the permits, but there is little sign the disagreement between ministries
is close to a resolution.
* * *
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178 West Service Road
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Box 178
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Franklin Sanders
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