News & Events
December 30th, 2010

Jakarta. Indonesia’s mining sector has attracted Rp 53 trillion ($5.88 billion) in bank financing up to September of this year, surpassing Rp 43 trillion for all of 2009, and is set to grow further in coming years due to strong demand and escalating prices of minerals.

That figure far exceeds the Rp 14 trillion that banks loaned to the mining industry in 2006, figures from Bank Indonesia show, despite the current uncertainties over the country’s new mining law.

The growing industry has persuaded banks to extend loans to develop mines and for support activities such as transportation, said Francisca Nelwan Mok, managing director of corporate banking at Bank Mandiri, Indonesia’s top lender.

“Indonesia’s mining industry has been growing fast in the last five years because of demand from markets like China and India,” Francisca said at a mining conference.

Financing has been one of the main concerns over launching projects in Indonesia, particularly in the absence of longer-term mining deals.

Contracts under the 1967 mining law have been abolished under a new law issued in 2009 and replaced with shorter-term mining permits.

However, with prices of mining resources such as coal hitting more than $100 per ton, along with strong economic growth in Indonesia and Asia, less focus will be given to risks surrounding the new regulations, bankers said.

“Indonesia is Indonesia. It is still considered a high-risk area,” said Vincent Poizat, director and head of mining at ING Bank N.V. “There is strong interest as, from a banking perspective, I don’t see any new issues coming out from the new mining law.”

Financing for mining will focus mostly on coal projects, which are easier to extract compared to base metals such as copper and nickel.

Some regional governments and private companies have launched railway projects in the main coal-producing regions of Kalimantan and Sumatra.

“There will be more interest for financing mining infrastructure. Banks view it as more safe and less risky because there is government backup for projects in railways, ports or logistics,” said Achmad Reza Widjaja, chief economist at Bumi Resources, Indonesia’s top coal producer.

Indonesia has forecast coal output to increase by 19 percent next year, while tin output is expected to rise to 95,097 tons from 54,646 tons this year.

Indonesia has struggled to attract foreign investment into its mining sector in recent years due to widespread corruption and uncertainties surrounding mining regulations.

Southeast Asia’s largest economy is expected to grow more than 6 percent this year, though. Together with increased political stability, those factors are attracting strong foreign capital inflows to its bonds and stock markets as well as the mining sector, with investors and banks hoping for further reforms.

“Indonesia has a stable economic outlook and is fundamentally sound,” Achmad said. “If this continues until 2014, it will boost interest.”

While the regulations contain many unresolved issues which could delay projects and the award of tenders and permits, analysts said they offer investors some direction on the government’s mining policy.

“Some banks are still very cautious about giving loans because the government has not yet rolled out the rest of the regulations,” Achmad said.
“But it will change when all the regulations are well in place.”

One key government regulation still in the pipeline is the process of tendering mining areas, which will be crucial for investors to obtain mining permits in the future. Reuters

Source : JakartaGlobe, December 13, 2010