Mining industry is highly vulnerable to the external risks particularly volatility of the commodity prices and policy risks. In the early 2020, virus SARS Cov-2 (Covid-19) almost shutted down the world economy after the World Health Organization (WHO) declared the outbreak as the Global Pandemic. Most of the world economy have entered into the recession which worse than the 2008 financial crisis. That is why TIME magazine labels the 2020 is the worst year ever in the cover of its weekly publication. Some of the mineral commodities, except gold, have seen their prices hits its lowest level in years. Despite all the negativity, there are some positive news in regards to regulatory aspect as the government and the parliament enacted the New Mining Law and the Job Creation Law amidst the pandemic. This gives optimism for the industry to face the 2021 where mosf of the world economy is in the recovery mood. However there are still huge challenges and uncertainties in the new year ahead.
Pandemic is perhaps the most single important factor that impacted the mining industry severely in 2020. During the pandemic, most of mining activities are in relatively normal condition despite companies enforcing strict physical distancing measures to prevent the outbreak. In doing so, companies are burdened with more additional operational costs while struglling to cope with the weakening demand impacted as result of the trade war. The pandemic hits the industry on the demand side which triggers commodity prices downturn.
Big miners both mineral and coal producers perform relatively well in terms of keeping the production plan intact amidst the pandemic. Despite the weakening demand which force most miners especially coal producers in the survival mode, the tax and non-tax contribution of the mineral and coal sector is crucial to the nation. Miners have been doing their utmost to maintain the workforce in order to support the national and regional economic recovery. Coal producers have been working around the clock to ensure the domestic supply not disturbed.
The pandemic does not only impacting the demand but affecting miners’s investment plan. According to the data compiled by the Ministry of Energy and Mineral Resources, investment realization as of October 2020 fell to more than 60% compared to the 2019 figure. Miners are forced to scale back their investment plan which hampered by the logistical supply problems. PT Freeport Indonesia and PT Amman Mineral Nusa Tenggara have notified the government that their copper smelter projects were affected so that it is difficult for each project to meet the dealine as initially planned.
Inspite all the negativity, there were some positive news particularly on the regulatory aspect. The enactment of the Law No. 3 of 2020 on the Amendment of the Law No. 4 of 2009 on Mineral and Coal Mining provides long-term certainty not only for holder of Coal Contract of Work (CcoW) but also for Contract of Work (CoW) and Mining Business Permit holders (IUP). In addition, the issuance of the Law No. 11 of 2020 on Job Creation (Omnibus Law) also exemplifies the commitment of the Joko Widodo – Ma’ruf Amin’s administration to boost the investment climate.
Perhaps one of the best achievements in 2020 by the mining industry is the selection of four coal companies as the recipient of the gold rating (the highest rating) in the Proper LH (Environmental Rating conducted by the Ministry of Environmental and Forestry). Of the 36 recipients of the gold ratings, 30 are from energy and mining industries including geothermal, power generation, coal, and oil and gas. Only 6 companies from industries outside of energy and mining industry. This exemplifies the commitment of energy and mining companies in implementing their highest environmental management standard even in the perhaps the most difficult year that the industry has experienced. Unfortunately this encouraging news have received only small media coverage.
In the demand side, the recovery of the world economy provides positive outlook for miners in anticipating the year ahead. China economy is having the fastest growth among the G-20 countries. The world second biggest economy is performing well with its purchase manager index records the highest level in years. On the other hand, the US and European countries are still struggling to cope with the spread of the corona virus including the possibility of the new strain as emerged in the United Kingdom. The uncertainty over the Brexit deal with the European Union is still looming. Meanwhile the upcoming new leader of the United States although is highly welcomed but it projected not too give significant breakthrough in 2021.
Coal demand is expected to grow again in 2021 thanks to the recovery of the Chinese economy. Indonesian coal miners expect to cultivate to the recently signed memorandum of understanding (MoU) signed by APBI-ICMA and its counterpart China Coal Transportation & Distribution Association (CCTDA) witnessed by representatives from the two countries. In the MoU which valid for three years, the two parties agreed to enhance their cooperation to boost coal export from Indonesia which is targeted to reach 200 million tonne.
As the World’s biggest coal importer, China’s role remains significant in affecting the commodity price. The country represents more than quarter of the total global seaborne thermal coal market. The recent coal import restriction imposed by China on Australian coal raises concern over uncertainty in global coal demand. Such issue could provide an opportunity for some of Indonesian coal exporters to feed the growing demand in China ahead of the Chinese new year. The increase of the coal price is partly due to the rising of demand from China as its domestic coal prices continue to rise.
In the policy side, the mining industry has been awaiting for the finalization of implementing regulations of the Law No. 3 of 2020. The government is to issue 3 government regulation (PP) on the business activity of mineral and coal industry, reclamation and post-mining and mining area. Although the Law mandates the implementing regulations should be completed at the latest 1 year after the enactment of the Law, which is June 2021 but the government confirms the regulations should be ready within 6 months. So far the industry has limited access to study the draft regulations as the government has invited industry and professional associations for once meeting only, and yet it without a complete draft.
For coal miners, especially CcoW holders, the concern over the possibility of the royalty tariff hikes is still lingering as the government not yet finalizing the draft of government regulation on the tax treatment for coal companies. Technically the regulation should have been issued at the latest on December the 1st 2020 as the legal basis for the tax obligation of the holder of Special Mining Business Permit (IUPK) Production Operation (ex-CcoW holder) . There was a proposal from the Ministry of Finance to impose the new royalty tariff of 24% to be applicable to the IUPK OP holder, which is extremely higher compared to the existing 13.5% tariff. Our existing tax scheme is seen as not attractive and not competitive compared to many other mining producing countries.
The 1st generation of the CcoW holders also are facing though business challenges in investing in the coal downstreaming project. The government requires the coal miners to invest in coal development or coal utilization project as part of the evaluation of their contract extention proposals. Under the Law No. 3 of 2020, coal development consisting of coal gasification and coal liquefaction among others. Meanwhile, coal utilization is related to the building of mine-mouth power plant. Details on the coal downstreaming obligation should be regulated in the incoming GR on the Law No. 3 of 2020.
For nickel producers, the potential demand electric vehicles provides positive development on the investment on the nickel processing facilities. The proactive measures taken by the Government to impose raw material export ban and regulate the nickel price should be appreciated. However the government should also consider to provide non-fiscal incentives and utmost support to make development of copper smelter economically viable. Keeping mineral producers to sustain their investment to support the recovery of national and regional economy is very important.
In terms of external economic factor, miners expect to enter into recovery mode in the 2021. Given the recovery of the world economy in particular with the arrival of vaccines, such optimism is highly understandble. However uncertainty factor remains including geopolitical tension. In the national level, investment friendly policy and regulation would be the most decisive factors that could shape the future of the national mineral and coal industry. So long 2020, the year that perhaps no one won’t miss. And let us welcome 2021 with huge optimism for our better future.
(*) Executive director of Indonesian Coal Mining Association (APBI-ICMA), member of the Energy and Mineral Resources Committee of the Indonesian Employers Association (APINDO), vice chairman and co-founder of Indonesian Mining Association, member of the Board of PERHAPI. The opinions expressed are his personal view.