John McBeth, Jakarta – The long drawn-out saga of mining giant Freeport Indonesia's (PTFI) proposed new copper smelter has taken a new turn with China's Tsingshan Steel agreeing to build the US$1.8 billion facility at its Weda Bay nickel processing complex in Halmahera, eastern Indonesia.
Maritime Affairs and Investment Coordinating Minister Luhut Panjaitan disclosed in an interview with Asia Times that the deal is expected to be signed before next March. "We are happy with the agreement," he said, "but the two sides are still in detailed discussions."
Up to now, the choices have been to either expand Mitsubishi's existing copper smelter at Gresik, East Java, build a new and much more costly smelter at a nearby industrial estate or shift the whole project to Halmahera as part of an integrated smelting hub.
Panjaitan and other sources familiar with the deal say Tsingshan has agreed to complete the smelter within 18 months, leaving Freeport to build a $250 million extension to the Mitsubishi plant in what could be seen as a token gesture of its commitment to the in-country processing of all of its ore.
Mitsubishi and Freeport signed an agreement on November 13 to add 300,000 tons to the current facility's one million ton capacity, but the sources say Freeport is still ready, however reluctantly, to build a new smelter if the Tsingshan deal falls through.
The company is also committed to the construction of a precious metal refinery on the same site now that its export license has expired for so-called anode slime, the sediment rich in gold, silver, selenium and tellurium left over from the smelting process.
Confusion had reigned over the smelter issue for the past two years, with senior bureaucrats and politicians seemingly at variance on where it should be located. Once the Tsingshan deal is concluded, it will still need government approval.
As late as last week, Mines and Energy Minister Arifin Tasrif was continuing to dance around the subject. "The important thing for the government is that copper concentrate processing takes place in the country," he said, without offering any further explanation.
Panjaitan has been the main proponent of the move to nickel-rich Halmahera, taking Freeport and the Indonesian mining community completely unawares last June by revealing that President Joko Widodo had already agreed to the plan.
He is also the prime mover behind a planned electric vehicle industry, with South Korea carmaker Hyundai as an initial $1.5 billion investor and LG Chemical interested in building a lithium battery plant on the same site near Jakarta.
With Tsingshan also planning to complete a lithium battery factory at Weda Bay by 2023, the new copper smelter will provide it with the sulphuric acid needed to produce low-grade ferronickel for the stainless steel market and also to recover cobalt from spent lithium batteries.
Indonesia has 80% of the elements needed for lithium battery production, including cobalt, manganese, aluminum and even rare earth elements. But on the horizon as well is a recycling plant at Halmahera that may eventually remove the need for new minerals in the production process.
Freeport's copper will be a source of wiring and other parts for the home-grown electric car industry Panjaitan envisages. According to one expert estimate, battery electric vehicles use as much as 83 kilograms of copper, compared with 23 kilograms for an internal combustion engine.
Investment service Seeking Alpha said recently that the Indonesian subsidiary's parent company, Freeport McMoRan Copper & Gold (FCX), has "a unique opportunity in a high copper priced world" to take advantage of the growing demand for electric vehicles.
If it goes ahead, as now seems likely, a deal with Tsingshan would save the Indonesian government and FCX about $3 billion, the estimated cost of building their own smelter at the Gresik Industrial Estate, north of the port city of Surabaya.
As the new majority owner of PTFI, the government is already having to pay for half of the cost of a major underground expansion at the Grasberg mine in Papua's Central Highlands, the world's largest gold reserve and second-biggest copper mine.
Regarded as one of the world's most profitable mining operations, thanks to its rich gold deposits, the proven reserves at the high-altitude Grasberg contribute to about a third of FCX's total portfolio, which also includes copper mines in the United States and Chile.
Unlike nickel, copper refining is a notoriously marginal business when the final process of turning concentrate into copper cathode adds only 5% to the overall value. By some estimates, any new Gresik smelter would have lost $10 billion over the next 20 years.
Asia Times understands that Freeport has undertaken to pay treatment and refinement charges (TCs/RCs) to Tsingshan that are higher than the market price by an amount equal to the 5% export tax the company currently forks out for the half of its concentrate it currently exports to mainly Japan and Spain.
While that would serve as a subsidy to Tsingshan's operating costs and the overall synergy appears compelling, financial experts still question the economic viability of building a copper smelter in a place as remote as Halmahera, a proposition Freeport would never have considered.
They say that dangling the export tax as a "subsidy" may be a clever idea, but even that may not produce a positive cash flow in the current environment. As one source put it: "Realistically, the only way to improve the economics is to cut the capital cost, which means no environmental controls."
Transporting Freeport's concentrate is not considered a major factor, but the distance between Freeport's port at Timika on Papua's south coast to the Halmahera site is only 2,660 kilometers, compared to the 4,000-kilometer passage to Gresik.
Tsingshan and French mining company Eramet began nickel smelting operations at the $2.2 billion Weda Bay Processing Park in April last year, adding to a pioneering multi-billion-dollar complex the Chinese group operates at Morawali on the east coast of Central Sulawesi.
Although the Gresik smelter has not attracted any ancillary industry over the past 20 years it has been in operation, Panjaitan is still confident of drawing overseas investors to Halmahera, particularly Chinese manufacturing companies anxious to move offshore.
China already has an iron grip on Indonesia's nickel industry, inciting some controversy by bringing in thousands of its workers to construct the two processing centers in Central Sulawesi and now Halmahera.
At Sulawesi's $7.8 billion Morowali complex, Tsingshan and Indonesian partner PT Bintang Delepan operate a three million ton a year nickel pig iron smelter, a 500,000-ton carbon steel facility and a 600,000-ton high-carbon ferrochrome plant.
Further down the coast, in Southeast Sulawesi, China's Virtue Dragon Nickel Industry last year completed the $1.4 billion first stage of its three-phase Konawe complex, which will eventually boast a production capacity of three million tons of ferronickel a year.
President Widodo's closest adviser on a range of subjects, Panjaitan has always treated the Freeport smelter as the ultimate test of the government's resolve to add value to its minerals and vault the country in global supply chains.
Phoenix-based FCX has been reluctant to build a new smelter because of the high capital cost involved and the reality, which the government has always stoically ignored, that smelting has never been a profitable business at the best of times.
But circumstances may have changed with the government's 2018 acquisition of a 51% stake in PTFI, in exchange for the extension to FCX's contract, and the outbreak of the coronavirus pandemic that has put an additional strain on state finances.
Source: https://asiatimes.com/2020/11/china-solves-freeports-3-billion-problem-in-indonesia