Bali, Indonesia – Indonesia's government on Wednesday defended the country's plan to hike mineral royalties, arguing the policy that has attracted widespread criticism from industry will "benefit" Southeast Asia's largest economy.
Ministers have announced that royalties on nickel ore output will increase from 10% to a range of 14%-19%, depending on price levels, on April 26. Royalties on other minerals, such as coal, gold, copper and tin, will be adjusted based or various criteria – including prices and permits – but in many cases they will double.
Mining executives have warned that the higher taxes might prompt some companies to halt production, particularly since many commodity prices have fallen this year amid geopolitical uncertainty and, in nickel's case – a slowdown in demand for electric vehicles.
But Cecep Mochammad Yasin, director mineral business development at the Ministry of Energy and Mineral Resources, told the Argus Nickel Indonesia Conference in Bali on Wednesday the new royalty policy would go ahead, arguing it is "a critical step toward ensuring that our natural resources give optimum benefits to all Indonesians."
Yasin stressed that setting the royalty rate based on the benchmark "reference mineral rate" "demonstrates the government's commitment to building a fair and sustainable system."
President Prabowo Subianto is looking to boost government revenue due to a recent drop in tax revenue, the cancellation of a value-added tax increase and higher spending on flagship programs like his free meals scheme for children and expectant mothers.
Most mining executives want the new royalty policy scrapped, or at least reviewed. "We fully understand that the government currently needs funds to run various programs... [but] this policy is not timely and we hope it will be reviewed," the chairman of the Indonesian Nickel Industry Forum, Alexander Barus, told Nikkei Asia. "Nickel prices are currently falling sharply due to geopolitical pressures and the trade war between the United States and China."
U.S. President Donald Trump on April 9 paused for 90 days the higher "reciprocal" tariffs imposed on trading partners. On the same day, three-month futures for nickel slumped to a near five-year low of $14,015 per tonne – less than half the recent peak of $31,275 in November 2022.
"The burden on the nickel industry is further increased by domestic policies, ranging from the retention of foreign exchange export proceeds and minimum wage increases," Barus said.
Nickel is a critical part of EV batteries and Indonesia hopes to leverage its status as the world's biggest producer of the mineral to establish a domestic battery supply chain.
Another mining executive said some investors had paused plans because of "unclear government rules."
"There are already investors, investment managers who want to invest, but backed out because they see the legal uncertainty in Indonesia that makes all business calculations such as break even point, capex that must be prepared," he said.
"Rules can easily be made and applied without any approval or discussion with businesses. The case of the increase in mining royalty rates is one example."
"Mining businesses have been hit by multiple pressures, from mandatory Biodiesel B40 which is 20% more expensive, value added tax, weakening exchange rates," he continued. "Operational costs are too high so rather than losing money, many companies will choose to stop operations and that of course will be followed by mass layoffs."
However, Meidy Katrin Lengkey secretary-general of the Indonesia Nickel Miners Association (APNI), expressed support for the new royalty rates. "The government should not delay the royalty program, it's already decided to become effective April 26, because the country needs revenue," she told Nikkei.
But the association has also acknowledged the new rates could threaten some mines profitability.
"If only a 14% royalty is applied, there are several mines that might choose to stop their operations because of the potential for production losses if they continue," Lengkey said last month.
As a way to promote the country's industrialization and downstreaming policy, the Indonesian government brought in an effective ban on raw material exports in 2020 and asked mining companies to process and refine commodities domestically to improve the mining sector's value-added benefits.
Indonesia is aspiring to become an advanced economy by 2045, its 100th anniversary of independence. Prabowo has set a target of annual economic growth of 8% by the end of his term in 2029 from the current level of over 5%. He has stressed that deriving added value from industries is critical to achieving these goals.
[Additional reporting by Rezha Hadyan.]