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Indonesian miners are cautioning about diminished profits and potential cuts in output following the government’s rise in royalties imposed on one of the nation’s key export sectors.
Recently, Jakarta increased the rates for royalties on nickel, coal, copper, gold, and other minerals, impacting some of the largest mining corporations globally, such as Vale and Freeport-McMoRan. This decision comes as the financially strained government seeks to enhance its revenue for extensive spending projects.
The nickel royalty will see the most significant rise, with the charge going from a steady 10 percent to a range between 14 and 19 percent, depending on the market price of the metal.
As the largest producer of nickel globally, Indonesia plays a crucial role in the supply of this essential component for stainless steel and electric vehicle batteries.
“This adds more pressure, particularly given that the regulation was introduced during a decline in commodity prices,” noted Hendra Sinadia, executive director of the Indonesian Mining Association.
He pointed out that operational costs are expected to rise, potentially leading to reduced profits. “Some companies may be forced to lower their production or even halt mining operations,” he added.
Commodities are vital to Indonesia’s economy, significantly driving growth. The nickel industry has expanded rapidly in recent years, drawing record levels of foreign investments.
However, the new royalty increases come at a time when nickel producers are already facing challenges from falling metal prices and heightened expenses due to new regulations in Indonesia.
This year, mining companies have reported increased costs tied to a rise in value-added taxes and new mandates to utilize more biodiesel for fuel.
Since March, Indonesia has also required exporters of natural resources to keep a greater portion of their overseas earnings in the country for at least a year to strengthen foreign reserves and stabilize the rupiah, which is close to historic lows.
The government has justified the hike in royalties, with an official stating it’s part of measures to ensure “our natural resources benefit all Indonesians optimally.”
Indonesia’s fiscal situation has been increasingly strained due to President Prabowo Subianto’s $28 billion initiative to provide free meals to school-aged children and expectant mothers.
The government is pursuing a $19 billion austerity campaign to allocate funds toward the president’s prominent policy while trying to enhance state revenue.
There was a concerning drop in revenue during the initial two months of the year, which triggered a sell-off in the stock market and impacted the currency.
Hendra remarked that the government is leaning on the commodities sector due to limited alternatives. “The state budget is under pressure . . . sadly, we are seen as the only hope for the government,” he mentioned.
The Indonesian Nickel Miners Association criticized the timing of the royalty hike, given the current low metal prices and an escalating trade conflict between the US and China.
“The rise in royalties could reduce investment interest in both upstream and downstream nickel sectors, undermine the competitiveness of Indonesian nickel in the global market, and lead to widespread job losses due to financial strains,” the association expressed in a released statement.
A senior executive in the nickel industry, who preferred to remain anonymous, indicated that miners lacking integrated processing operations would feel the most significant impact. They would likely transfer the increased expenses to smelters, thereby affecting the whole supply chain, he warned.
Additional reporting by Diana Mariska
