Following our previous Legal Alert on the ban of the exportation of unprocessed raw minerals (i.e. copper, nickel, and bauxite), we will now assess the development of the processing and refining industry (“P&R”), which is also Indonesia’s priority to expedite the progress of the downstream industry.
This priority is more focused now than ever as Indonesia seeks to accelerate the construction of new smelters to prepare for its appeal on its nickel dispute against the European Union by 2024 or 2025.
Further Commitment to Indonesia’s Ban Policy: Boosting the P&R Industry
- Introduction of Smelters and Increase in Domestic Value of Minerals
Following the ban on exporting raw minerals and in order to accommodate the higher volume of raw minerals within the country, the P&R industry introduces new P&R facilities such as smelters, which play an imperative role to boost P&R and ensure that Indonesia is capable to reap the benefits of the ban – primarily to materialize the added value of by-products, open employment opportunities, and/or satisfy domestic demand.
This insight is shared by the Ministry of Energy and Mineral Resources (“MEMR”) embodied in Law No. 4 of 2009 on the Mining of Minerals and Coals, as lastly amended by Government Regulation In Lieu of Law No. 2 of 2022 on Job Creation (“Mining Law”) as holders of Mining Business License Production Operation (“IUP PO”) and Special Mining Business License Production Operation (“IUPK PO”) are obliged to increase the added-value of minerals domestically through:
- Processing and refinery for metal mineral mining commodity;
- Processing for non-metal mineral mining commodity; and/or
- Processing for rocks mining commodity.[1]
Furthermore, Government Regulation No. 96 of 2021 on Implementation of Mineral and Coal Mining Business Activities (“GR 96/2021”) regulates that holders of IUP PO and IUPK PO may only conduct overseas sales of minerals commodities produced once it fulfills the criterion of:
- Fulfilling the minimum limit of processing and/or refining; and
- Fulfilling the domestic mineral needs.[2]
The minimum limit aforementioned varies upon the commodity with the specifics mentioned within the Attachments of MEMR Regulation No. 25 of 2018 on Mineral and Coal Mining Business, as lastly amended by MEMR Regulation No. 17 of 2020 on Third Amendment of MEMR Regulation No. 25 of 2018 (“MEMR 25/2018”).[3] In the instance that a certain commodity is not listed within the appendixes, such commodities may only be sold abroad once the minimum limit has been determined by the Minister of MEMR.[4]
Furthermore, holders of IUP PO for metal minerals or IUPK PO for metal minerals may carry out sales of processed products abroad using the post tariff/harmonized system up to no later than 10 June 2023 if it fulfills the criterion of:
- Producing processed products;
- Paying export duty in accordance with prevailing laws and regulations; and
- Currently building their own refinery facilities or cooperating in conducting refining activities.[5]
The above provisions determine the positive obligations onto the entities of the mining sector to actively conduct and/or construct P&R in the Indonesian territory rather than sell such unprocessed commodities directly to overseas buyers.
- Development of Nickel Smelter
It can be conceived that, particularly for nickel, Indonesia adopted the methodology to execute the ban on the raw mineral prior to the establishment of new nickel smelters; once the particular raw mineral has been banned for export, then the construction of new P&R facilities shall soon follow.
The above process has been demonstrated by the fact that the majority of smelters in Indonesia are nickel smelters since the ban on nickel exports in 2019.[6] Nonetheless, this strategy of establishing the ban and then having parallel progress between the ban policy and the construction of new P&R facilities is susceptible to attacks as Indonesia’s sub-par infrastructure conditions for smelters are not definitively able to support the ban policy. This is evident especially since the Panel of the World Trade Center cited the present downstream industry in Indonesia to be immature.[7]
One perspective is that the policy of banning such raw materials exports is too hasty when taking into consideration that the production volume of domestic copper concentrate does not match the rate of domestic absorption. This drawback has already been identified by the Association of Indonesian Mining Experts (Perhapi) which exclaimed that the annual production of 4 (four) million tonnes of copper per year shall not be fully absorbed due to the national smelter capacity volume only being 1.3 (one point three) million tonnes per year.[8]
Further, the MEMR speculated that smelter investment is still highly expensive, high risk, with minimal supply of energy and infrastructure support, not yet the optimal stimulus for fiscal or monetary incentives, and not yet any guarantee of supply for smelters that do not have mines as well as spatial suitability.[9] Thus, it is not far-reaching to envision that investors, who are willing to inject into the construction of smelters, are scarce, and in turn, this emphasizes the possibility of delaying such construction if there are limited funds. One proposition is to concentrate on providing guarantees to such investors with an offtake agreement that secures the by-products of the smelters for the investors to buy once the by-products are complete and strong reassurance would be the policies to retain such raw minerals within the Indonesian territory.
Entities Conducting Smelting Business Activities: The Standard Licensing Requirements
1. Smelters conducting P&R may hold an IUP PO, IUPK PO, or Mining Business License Production Operation Specifically for P&R (“IUP POSPR”). Under the Mining Law, all activities in relation to mining shall have their licenses provided by the central government[10] which must consist of (i) Business Identification Number; (ii) Standard Certificate; and (iii) Licenses.[11] Business entities/cooperatives/individuals (“Applicants”) may conduct the activities of construction, mining, P&R, and transportation and sales for IUP PO and IUPK PO;[12] or P&R and transportation and sales for IUP POSPR.[13] The acquirement of such licenses is guided by GR 96/2021 and MEMR Regulation No. 7 of 2020 on Procedures For Granting Area, Licensing, and Reporting in Mineral and Coal Mining Business Activities, as lastly amended by MEMR Regulation No. 16 of 2021 on Amendment to MEMR Regulation No. 7 of 2020 (“MEMR 7/2020”).
a. IUP PO and IUPK PO
Applicants must obtain the approval of the Mining Business License Area (“WIUP”) or Special Mining Business License Area (“WIUPK”) first[14] and file a request for IUP Exploration or IUPK Exploration to MEMR.[15]
IUP PO is the business license granted to carry out the stages of production operation activities after the implementation of a Mining Business License Exploration (“IUP Exploration”) has been completed.[16] IUP OP is granted either (i) by the Minister of MEMR, if the mining location, processing and/or refinery location, as well as special port location, is located across provincial regions or is directly adjacent to other countries; or (ii) by the Governor, if the mining location, processing and/or refining location, as well as special port location, is within 1 (one) provincial region.[17] In contrast, IUPK PO is the business license granted to carry out the stages of production operation activities after the implementation of a Special Mining Business License Exploration (“IUPK Exploration”) has been completed.[18] IUP OP is granted by the Minister of MEMR.[19]
IUP PO and IUPK PO act as a continuation of IUP Exploration and IUPK Exploration mining business activities by applying an upgrade into an IUP PO or IUPK PO.[20] The application must be submitted 1 (one) month before the expiry of the IUP Exploration or IUPK Exploration[21] and the criteria for IUP PO and IUPK PO consist of 4 (four) aspects:[22] administrative,[23] technical,[24] environmental,[25] and financial.[26] The effectiveness of the IUP PO or IUPK PO ranges between 5-20 (five to twenty) years depending on the commodity and may be extended twice.[27]
b. IUPK POSPR
This is the business license granted to purchase, transport, process, and refine, including to sell their processed products of mineral or coal mining commodities.[28] IUPK POSPR is granted either (i) by the Minister of MEMR or (ii) by the Governor.[29] Only business entities may apply for IUP POSPR for all the commodities whereas cooperatives and individuals are prohibited from applying for IUP POSPR for metal mineral, non-metallic mineral, and coal mining commodities.[30]
In order to obtain the IUPK POSPR, the Applicant must fulfill administrative, technical, environmental, and financial requirements.[31] The IUPK POSPR shall apply for 30 (thirty) years and can be extended for the following 20 (twenty) years per extension.[32]
Methodology Revamp
To avoid a repeat of scrutiny from the European Union, Indonesia has decided to switch the methodology order mentioned above; to construct the smelters first and then execute the ban policies to ensure no contests that the country’s downstream industry is not advanced enough to allow for an export ban to be carried out on the commodity.
To ascertain solid evidence of Indonesia’s readiness to ban the export of copper (which is expected to commence in 2023), the construction of copper smelters owned by PT Amman Mineral Nusa Tenggara at West Nusa Tenggara (“PT AMNT”) and PT Freeport Indonesia at East Java (“PT FI”) are projected to operate by the end of 2024.[33]
PT AMNT estimated that the copper smelter shall be capable to produce up to 222,000 (two hundred twenty-two thousand) tons of copper cathodes per year from the processing of 900,000 (nine hundred thousand) tons of copper concentrate while PT FI estimated that the copper smelter shall have the capacity of 1,700,000 (one million seven hundred thousand) tons per year and shall be capable to refine all copper concentrates in Indonesia.[34] Further, the MEMR has also previously announced their pursuit of constructing 53 (fifty-three) smelters by 2024 with the specifics of 17 (seventeen) integrated smelters and 36 (thirty-six) standalone smelters.[35]
Once Indonesia brings such evidence that clearly indicates that the country has the means to conduct P&R efficiently without waste, it would be difficult to argue that such bans on the commodities are without good reason.
Closing Remarks
In summation, Indonesia is determined to set stepping stones to further develop P&R by proliferating smelter facilities to defend itself against the European Union after exercising its right to appeal.[36] Regardless of how controversial the ban policies might be deemed by international eyes, such provisions will remain unchanging for now. Furthermore, although the core of strengthening the downstream industry through establishing smelter facilities would idealistically allow for more economic enjoyment, it remains to be seen how Indonesia can guarantee efficiency in its domestic absorption to maximize this industry.
[1] Article 102 paragraph (1) and Article 103 paragraph (1) of Mining Law.
[2] Article 158 paragraph (2) of GR 96/2021.
[3] Article 17 paragraph (1) of MEMR 25/2018.
[4] Article 17 paragraph (2) of MEMR 25/2018.
[5] Article 47 paragraph (1) and (2) of MEMR 25/2018.
[6] https://www.cnbcindonesia.com/news/20230223160259-4-416424/serius-dorong-hilirisasi-pemerintah-bidik-32-smelter-di-2023
[7] Point 7.119. of Report of the Panel No. WT/DS592/R dated 30 November 2022.
[8] https://katadata.co.id/happyfajrian/berita/63c0054a04772/peluang-empat-smelter-di-indonesia-menyambut-larangan-ekspor-tembaga
[9] Attachment of Decree of the MEMR No. 301.K/MB.01/MEM.B/2022 of 2022 on National Mineral and Coal Management Plan 2022 -2027 (“MEMR 301/2022”).
[10] Article 35 paragraph (1) of Mining Law.
[11] Article 35 paragraph (2) of Mining Law.
[12] Article 28 paragraph (3) of GR 96/2021.
[13] Article 49 paragraph (1) of MEMR 7/2020.
[14] Article 29 paragraph (1) and Article 68 paragraph (2) of GR 96/2021.
[15] Article 29 paragraph (2) and Article 86 paragraph (1) of GR 96/2021.
[16] Article 1 paragraph (16) of MEMR 7/2020.
[17] Article 42 of MEMR 7/2020.
[18] Article 1 paragraph (17) of MEMR 7/2020.
[19] Article 43 of MEMR 7/2020.
[20] Article 44 paragraph (2) of MEMR 7/2020.
[21] Article 44 paragraph (3) of MEMR 7/2020.
[22] Article 36 paragraph (2) of GR 96/2021.
[23] Article 37 and Article 93 of GR 96/2021.
[24] Article 38 and Article 94 of GR 96/2021.
[25] Article 39 and Article 95 of GR 96/2021.
[26] Article 40 and Article 92 paragraph (2) of GR 96/2021.
[27] Article 45 paragraph (2) of MEMR 7/2020.
[28] Article 1 paragraph (18) of MEMR 7/2020.
[29] Article 47 of MEMR 7/2020.
[30] Article 48 paragraph (1) and (2) of MEMR 7/2020.
[31] Article 48 paragraph (3) of MEMR 7/2020.
[32] Article 49 paragraph (5) of MEMR 7/2020.
[33] Katadata (n 8).
[34] Ibid.
[35] https://www.esdm.go.id/id/media-center/arsip-berita/7-smelter-selesai-hilirisasi-terus-berjalan-sesuai-undang-undang- and Attachment of MEMR 301/2022.
[36] Article 16.4 and Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and under Rule 20(1) of the Working Procedures for Appellate Review.