By Michael Taylor and Wilda Asmarini
JAKARTA (Reuters) - Indonesian policies to force miners to process raw materials at home are misfiring, as disputes over the new rules disrupt plans to invest nearly $4 billion in copper smelters to cater for miners such as Freeport-McMoRan Copper & Gold.
President Susilo Bambang Yudhoyono imposed a controversial mining law on January 12, but the rules have left the mining sector in turmoil. As well as a ban on unprocessed ore shipments, a last-minute export tax on concentrates was also brought in.
The tax ratchets up sharply before an outright export ban from 2017 and Freeport and Newmont Mining Corp, which produce 97 percent of Indonesia's copper, have halted all exports and are locked in talks with the government because they say the tax breaches their contracts.
This has deepened uncertainty on plans to construct three copper smelters, since the firms building them say they need firm supply guarantees from Freeport and Newmont to put in place financing so they can proceed. Miners may have to slash output if there is not enough refining capacity once the export ban takes effect in 2017.
The impasse shows how a policy aimed at supporting higher value economic activity has not only stopped mineral exports but risks undermining the type of investment it was supposed to promote.
"There is going to be another train wreck because there isn't enough time to get approvals and build smelters before the new 2017 deadline," said Julian Hill, a Jakarta-based mining advisor at Deloitte Konsultan Indonesia. "The mining ministry is beginning to realize that they have created one hell of a mess and are looking for ways out of it."
Before the ban, Indonesia was the world's biggest exporter of nickel ore. It is also a major supplier of refined tin, thermal coal and copper.
If no new smelters are built by 2017, Freeport and Newmont face curbs on their operations since Indonesia's lone copper smelter, PT Smelting, only has a concentrate capacity of about 660,000 tonnes. Concentrates are an intermediate product between ore and metal, enriched with minerals as a result of processing.
Freeport has said if it could only send shipments to PT Smelting it would have to cut output at its huge Grasberg mine by 60 percent and layoff thousands of employees.
Privately owned PT Indovasi Mineral Indonesia, PT Nusantara Smelting and PT Indosmelt say they are ready to start work on the construction of three separate copper smelters that have the backing of Indonesia's industry ministry.
Freeport and Newmont have signed either conditional sales purchase agreements or MoUs with the three projects, but the smelter firms say a firmer commitment on volumes and prices of concentrate is needed.
"Once we have a definite contract with Freeport, then we will immediately start," said Taufik Sastrawinata, president director at PT Indovasi Mineral Indonesia, adding the project had equity from partners but needed finance deals.
With the proposed smelters due to take between three and five years to build and needing additional permits, there is little chance of them being ready by 2017 when exports of concentrates are due to stop completely.
For new smelters to be feasible, supply has to be guaranteed from Freeport, which would make up about 70-90 percent of supplies needed to feed the projects.
Isa Riyadhi, a director at PT Indovasi, said after having regular contact with Freeport it had not been able to communicate about its smelter project in the last month.
"For independent smelters like us, we need special (supply) terms for the first 10 years, otherwise no smelter will be built," he said.
The price is vital, since treatment and refining charges are expected to be higher those facing some rival copper smelters outside of Indonesia.
Freeport and Newmont did not respond to phone calls and emails seeking comment.
Sukhyar, director general of coal mines and minerals at the energy and mines ministry, said the 2017 export ban would stay in place, but the government would monitor the situation.
The three new smelters would increase Indonesia's concentrate capacity five-fold to about 3.3 million tonnes and are vital given the prospect of production of copper in concentrate soaring about 40 percent over the next two years, according to an International Copper Study Group estimate.
PT Indosmelt, which is planning a smelter in South Sulawesi, is targeting an initial public offering by the end of 2015 to raise about $500 million, but wants financial incentives from the government to encourage investment.
The backers at the three smelter projects include project financing, international mining firms and Indonesian tycoons, according to sources who spoke on condition of anonymity.
Nusantara Smelting Corporation, which is planning a $1.2 billion project in East Java, said it needs a firm quantity supply commitment from Freeport by the end of the year.
"It is chicken and egg. We want to spend money if we have certainty," said Juangga Mangasi, director at Nusantara Smelting Corporation.
(Additional reporting by Melanie Burton in Singapore and Yayat Supriatna in Jakarta; Editing by Ed Davies and Randy Fabi)