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Indonesian miners are warning of lower profits and reduced production volumes after the government has increased royalties collected in one of the country’s largest export industries.
Over the weekend, the move affecting some of the world’s largest mining groups, including Vale and Freeport-Mcmoran, including Jakarta, increased royalties fees applied to the production of nickel, coal, copper, gold and other minerals. The increase occurs as financially tense governments try to raise revenues to fund their ambitious spending plans.
Nickel has one of the biggest increases, with taxes rising from a flat 10% rate to the 14-19% range, depending on the price of the metal.
Indonesia is the world’s largest producer of nickel, an important component of stainless steel and electric vehicle batteries.
Hendra Sinadia, executive director of the Indonesian Mining Association, said:
Operating costs will rise and profits will be hit, Hendra said. “Some companies may need to reduce production or close the mines,” he added.
The product is a mainstay of Indonesia’s economy and a major contributor to growth. In particular, the country’s nickel sector has been developing rapidly in recent years, attracting record amounts of foreign investment.
However, there will be an increase in loyalty as nickel producers are tackling the decline in metal prices and higher costs from other recent Indonesian regulations.
Mining companies say costs have risen this year due to increased VAT and requirements to use more biodiesel as fuel.
Since March, Indonesia has also requested that natural resource exporters maintain more foreign income on land for at least a year, promote foreign reserves, and stabilize rupiahs, which are trading near the record lows.
Jakarta has defended the move to increase royalties, with one formula saying “it is part of our efforts to ensure that our natural resources provide optimal benefits for all Indonesians.
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The country’s financial position is strained by Prabowon Suboant’s $28 billion plan to provide free meals to school children and pregnant mothers.
The government is embarking on a $19 billion austerity drive to free funds for the president’s flagship policy, and is trying to increase the state’s revenue.
In the first two months of the year, earnings suffered a surprising decline, leading to divestment in stock markets and currency.
Hendra said he is tapping on the product sector as the government appears to have very limited options. “The state’s budget is struggling. Unfortunately, we are the only hope for the government,” he said.
The Indonesian Nickel Miners Association said the rise in royalties has been “deteriorating” amid declining metal prices and the escalating trade war between the US and China.
“The increase in loyalty could reduce returns on investment in the upstream and downstream nickel sectors, weaken the competitiveness of Indonesian nickel products in the global market, leading to large layoffs due to margin pressure,” the group said in a statement.
Executives from the senior nickel industry who asked not to name them said miners without integrated processing facilities would be most affected. They probably handed the smelters high costs, which will affect the entire supply chain, he said.
Additional Reports by Diana Mariska
