Indonesia is facing chaos and perhaps even the collapse of its crucial mining industry as a result of an ill-judged piece of economic nationalism.
On January 12 a ban on the export of raw mineral ores is due to go into effect unless there is a last-minute compromise between the government and the mining companies.
The ban is part of a regulation introduced in 2009 with the aim of promoting the construction of smelters in Indonesia, and thus nurturing downstream technology and jobs in Southeast Asia's largest economy.
That is not what has happened, however. Mining industry economists are predicting that instead of a leap forward, the ban will produce a massive fall backwards.
They estimate that most of the 800,000 people working in Indonesia's mining industry could lose their jobs. The economy could lose the $400 million a month – $4.8 billion a year – it derives from mining revenue at a time when it is already experiencing a $700 million-a-month trade deficit.
The United States' Freeport-McMoRan, one of the major mining companies in Indonesia which operates the world's largest copper and gold mine at Grasberg in southeastern Papua province, warned in a recent statement its production could shrink by 60% as a result of the ban.
This could mean a loss of 15,000 jobs and cost the government $1.6 billion a year in lost royalties, taxes and dividends.
The Jakarta government thinks the mining industry's reaction is alarmist and self-serving. The impact of the ore export, it says, would be "more or less neutral or relatively manageable."
Indonesia is the world's top exporter of nickel ore, coal and refined tin and a major exporter of bauxite.
Mining contributes about 12% to the country's gross domestic product.
But although the idea behind the ban as a stimulus to smelter construction was well meaning, it was ill thought out and ignored the problems on the ground the mining companies would face.
To begin with, several economists contend that there is not a good economic case for developing smelters.
They are greedy for investment capital, which the country needs more urgently in other sectors, produce small profits and almost inevitably generate expensive environmental contamination.
Indonesia is a vast archipelago of more than 17,500 islands and 238 million people. Infrastructure necessary for running smelters is largely non-existent in the outlying regions, where most of the mines are.
Even so, many mining companies are trying to comply with the government's demands, and 177 proposals have been submitted to build smelters.
However, such is the complexity of the approvals needed from various departments of government, that only 28 of these proposals have navigated this obstacle course and are now being built.
Only one new smelter is in operation.
This belongs to the state-owned company Aneka Tambang in West Kalimantan and is producing chemical-grade alumina from bauxite.
This coincidence has fuelled speculation that the ban's real purpose is a nationalistic drive to make smaller, foreign-owned mining operations uneconomic, enabling Indonesian investors to snap them up at a premium.
It seems inevitable that if the ban goes ahead, it will result in a significant restructuring of the Indonesian mining industry.
At best, small operations that cannot afford to build smelters will be forced to sell their ores, probably at a discount, to big operations, domestic or foreign, that can make the investment.
However, Indonesia is the land of the last-minute compromise, and the closer January 12 looms, the more likely it is that some elegant solution will be found. •
