Business News

Published: Saturday April 6, 2013 MYT 12:00:00 AM
Updated: Friday April 26, 2013 MYT 1:04:01 AM

Stricter plantation and mining rules in Indonesia

A worker loads palm fruits onto a truck at a
palm oil plantation in North Sumatra.
Another revision on plantation regulations will be announced by the Indonesian
Agriculture Ministry later this month. —EPA

A worker loads palm fruits onto a truck at a palm oil plantation in North Sumatra. Another revision on plantation regulations will be announced by the Indonesian Agriculture Ministry later this month. —EPA

THE winds of change are fast sweeping across the plantation and mining landscape in Indonesia the world's largest palm oil producer and one of the global players in gold, coal, nickel, copper and tin mining. And it's going to have a material impact on Malaysian companies in the republic.

The affect of those changes on the fortunes of Malaysian corporations is mainly in the form of tighter business regulations and conditions closely related to the environmental sustainability and socio-political factors, but the thrust is basically to limit foreign investors' ownership and the sheer size of their ventures in the republic, says industry players.

The latest is the revision on plantation regulations which will be announced by the Indonesian Agriculture Ministry later this month.

The revisions, as highlighted by Bisnis Indonesia newspaper recently, will include:

Plantation company or plantation group of companies with the same management and owner shall have a maximum acreage of 100,000ha. Both Regulation No. 26/2007 and the upcoming revision are based on Law No. 18/2004, which states that the Ministry of Agriculture shall stipulate the minimum and maximum acreage that may be granted to a company, while the governmental agency in charge of land affairs shall issue the land titles.

Plantations licence (IUP) will only become effective after receiving recommendation from Ministry of Agriculture. Previously, the IUP is given directly by the Regent where the plantations operate.

Obligation to allocate 20% of concession area to smallholders. This requirement is not new and is stipulated in the location permit (Izin Lokasi) when a plantation company is granted concession.

Industry expert M.R. Chandran tells StarBizWeek that: “The stringent plantation regulations in Indonesia will drive many local plantation companies to seek elsewhere for their new land bank expansion.

“Big planters from Malaysia facing limited land bank and acute labour shortage, in fact, have been looking seriously at new frontiers in Africa, Brazil, Equador and Asia namely Laos, Cambodia and Myanmar.”

For over two decades, Indonesia has been the “shangri-la” for oil palm cultivation among foreign plantation companies including Malaysia. Companies had poured big money to snap up land in Kalimantan, Sumatra, Riau, Aceh and Jambi for cultivation of oil palm.

Chandran points out that the revision on Indonesia's plantation regulations could also be tied to the Forest Conversion Moratorium (FCM) in the republic, which will expire next month. Under the FCM in 2011, the authorities will not grant any new licence, permits, location licences for the use of primary forest and peat moss areas for a two-year period.

HwangDBSVickers Research says in its note that the new plantation regulations might potentially stop the expansions among big plantation companies in the republic.

“Plantation companies that has more than 100,000ha concession, either planted or not, may not be allowed to expand beyond what has already underway before the regulation is issued,” it added.

Furthermore, the research unit says the outgoing Indonesian President still has yet to announce the extension of the FCM. This, combined with the revision and the uncertainty in Indonesia's general election in April next year, will explain why most planters are aggressively raising their target expansions this year, having slowed down their expansions in 2012.

Having said that, HwangDBSVickers is hopeful that listed plantations remain exempted from maximum land restriction.

The top local plantation companies with big plantation land in Indonesia include IOI Corp Bhd, Sime Darby Bhd, Kuala Lumpur Kepong Bhd, Genting Plantations Bhd and United Plantations Bhd.

Similarly, changes in the Indonesian new mining law which limits foreign ownership in mines to 49% and below have impacted many foreign companies with long-term mining interests there.

One company facing such as a dilemma is PT Koba Tin, a 75%-owned subsidiary of Malaysia Smelting Corp Bhd (MSC), currently one of the world's leading integrated tin metal and tin-based products producer.

Currently, the application for another 10-year extention of PT Koba Tin's contract of works (CoW) in Indonesia that expires late last month is still hanging in the air.

The Indonesian government is still mulling over the application for the extension. The latest news is that PT Koba is still allowed to operate for another three months upon final decision by Indonesia.

A source close to MSC says: “The group is still hopeful and optimistic that PT Koba will be allowed for another extension, given its long-term mining presence in Indonesia.”

PT Koba has a long-standing CoW which commenced in 1973 for 30 years and got renewed for another 10 years up to March 31 this year.

Its CoW has given the company an exclusive rights for exploration, mining and smelting tin in a 41,680ha in Bangka-Belitung Island.

To accommodate Indonesia's new mining law, MSC last year undertook a strategic alliance with an Indonesian party, Optima Synergy Resources Ltd, that would enable the latter to subscribe up to 23% stake in MSC's wholly-owned Bemban Corp Ltd, which in turn hold 75% interest in PT Koba.

Upon renewal of PT Koba's CoW, the Indonesian partner will be able to increase further to 50% with an effective interest of 37.5% in PT Koba, subject to certain conditions precedent.

Upon completion of the transaction, MSC's effective interest in PT Koba will be reduced to 37.5% through subsequent reduction of a 50% stake in Bemban Corp.

In preparing for the worst, RHB Research in its recent report said: “We had incorporated a worst-case scenario based on MSC management's disclosure in a financial note that non-renewal of the CoW would have adverse impact on the company's investment and give rise to contingent liabilities totalling about RM150mil in PT Koba.”

After the disclosure, the research unit had factored in a potential impairment amounting to RM150mil estimated in MSC's notes to its accounts, estimating MSC's share of impairment from its original 75% effective interest at RM113mil compared with its earlier projection of only RM34mil.

Despite the uncertainy in Indonesia, the source says MSC group will actively look at identifying and undertaking exploration for new tin resources and strategic acquisitions of quality mining assets abroad.

It was reported that MSC last year was preparing to invest into large deposits tin-mining assets as well as help to develop the existing small-scale “artisanal” tin mines for miners in Central Africa.

In Congo, MSC would consider upstream venture, especially in the medium and large-scale industrial mining prospects.

Previously, MSC had been sourcing its tin concentrates from the central African countries for its smelting plant in Butterworth, Penang.

On the homefront, MSC tin mine is operated by Rahman Hydraulic Tin Sdn Bhd (RHT) in Perak. In 2011, RHT had submitted an application and proposal to the Perak Government for renewal and extension of its tin mining leases over an area of about 601ha to the year 2030.

Tags / Keywords: News, Business, Business, indonesia plantations and mining

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