(This article was first published in the Singapore Business Times on 3 April 2014)
Indonesia recently implemented a ban on the export of unprocessed minerals and ore, and media has reported the subsequent loss of over 500,000 jobs in the industry. This is the latest chapter in a long standing history of resource nationalism.
In an election year, the Indonesian government is playing its hand and hoping that the ban will be of greater long-term benefit to the people of Indonesia than royalties and taxes received from mineral shipment exports, currently worth over US$10 billion annually. By implementing a ban on the export of unprocessed minerals and ore, the government is foreseeing the need for the construction of smelters and processing plants within Indonesia and therefore job creation.
Time will tell if President Yudhoyono is holding a royal flush. The implementation of the ban is a stark reminder to all investors of the importance of learning the rules of the game and assessing the scope of the field before showing your hand.
Resource nationalism is neither new nor an anomaly in global economics. In 1938 the then president of Mexico, Lázaro Cárdenas, galvanised support for the nationalisation of Mexico’s oil industry by claiming “the oil is ours”.
Since then, the spread of resource nationalism has picked up momentum and left few resource rich countries untouched. New Mining Codes have been created, windfall taxes have been imposed on exporters, and companies have been expropriated. This phenomenon is not limited to Asia, as it rears its head in the oil industry in Venezuela, which set about nationalising its oil industry in 2007 to the detriment of several larger international oil companies. Argentina ordered a repatriation of export revenue of energy and mining companies in 2011, and Zimbabwe imposed mandatory indigenisation which demanded foreign mining companies transfer 51% of their share to the locals.
In 2012 the Australian Government imposed a Mineral Resource Rent Tax (MRRT) intended to raise approximately US$10 billion over three years. Neither the longevity nor the revenue raised from the MRRT have been particularly extensive. Lower commodity prices coupled with rising operating costs forced the downgrade of expected revenue to approximately US$2 billion by 2015 and the recent change in Government will almost certainly result in the Tax being repealed in July this year.
While it can be argued that it is a sovereign right for a country to protect and perhaps maximise its return on the finite resources it has, the manner in which this is implemented can have not only an impact of foreign inbound investment but also on the average worker.
The number of countries which have implemented some form of resource nationalism is diverse, as are the reasons behind the push. It is difficult to pin down the catalyst which drives each country to implement many of the reforms. Indonesia’s ban on mineral exports will undoubtedly have an effect on many exporters of raw minerals and ore. It is likely to also precipitate a strategic rethink by many foreign mining companies operating in Indonesia.
Interestingly some of the biggest foreign mining companies operating in Indonesia including Freeport McRoan and Newmont, were able to negotiate a number of concessions as a result of their sophisticated relationships with the Indonesian government. But these are temporary measures and with the possibility of tax on concentrate rising through 25% to 60% by 2016 even these companies will need to seriously reconsider their options for continuing to operate in Indonesia.
Making a call on the right balance of national interest and foreign investment is a challenge governments of resource rich nations will continue to face well into the foreseeable future.
When the government starts dealing their cards, an investor’s best hand is always the one that utilises the full suite of precautionary measures to keep them in the black.