The death of the South Kalimantan iron ore & smelting industry.

October 3, 2016 Ian Wollff Coal Asia publications 0

Introduction.

Indonesian iron ores tend to form scattered variable quality deposits that is a critical element in determining the business path for their exploitation. The governments push towards the smelter industry was realized in South Kalimantan with the development of several iron ore mines and the construction of two smelters to produce intermediate iron ore products. This article takes a brief view of this failed industry.

Indonesian Iron Ore geology.

Indonesian iron ores typically fall into three main categories. 1) Laterite, where certain underlying rocks are subject to selective leaching in the tropical weathering process leaving a surface of loose material rich in iron. The lateritic iron ores are typically divided into two types that of limonite – hematite and that of nickel – iron. There ores can form extensive, but typically low grade deposits. 2) Hard Rock, typically where igneous intrusions deposit magnetite and hematite ores as hard veins that extend down to great depth. Typically found as small high grade deposits. 3) Sand, where residual hard minerals of magnetite etc weather out of volcanic rocks and travel down rivers to accumulate along old and current beach fronts. These sands typically forms extensive deposits, but the fine nature of the ore is generally undesirable for most smelters. The 3 main iron mineral types are limonite, hematite and magnetite, each with different iron grade and processing characteristics. Commercial iron ore is highly sensitive to various associated elements, for example a very small amounts of phosphorous can rule out an ore for most smelters. Each of these geological deposits can have a high degree of variable quality characteristics, making the delivery of a consistent quality product very difficult.

It is understood that the location of the smelters in South Kalimantan was to take advantage of a number of scattered deposits of lateritic and some hard rock ores, plus close proximity to the supply of coal for the smelting process. The author has not been able to locate the feasibility study to support such smelters, and thus the due corporate care in understanding the geological nature of the ore supply is unknown.

Australia is the main international iron ore competitor. The geological character of these mines is typically that of geologically very old sedimentary deposits which are not yet found within Indonesia. These immense well defined rich deposits are extracted, transported with low cost and in huge quantities. The iron ore has a reliable quality and delivery schedules. There is little potential for Indonesia to compete head to head with such Australian iron ore businesses.

The South Kalimantan iron ore industry.

The Dutch were the first to record iron ore deposits in the Pelaihari area of South Kalimantan. The Japanese failed in their attempt to make iron during their occupation in South Kalimantan. In response to Soviet interest, the Indonesian government undertook (1956) a geological review of its iron ore resources, including South Kalimantan. Finally the soviets assisted with the development of Krakatau Steel mill, which was opened in 1997 at Cilegon, Banten (Java).

When I was working on a South Kalimantan coal project in 2005 I observed some aspects of the local iron ore industry. Village workers and farmers would pick up loose rocks from the fields and tiny rivers to make small “stockpiles” of 0.5 to 5 ton. A local trader would come around and visually asses these stockpiles for weight and quality, pay cash and arrange local informal contractors to manually pick up the rocks and truck them to a central stockpile. International buyers would purchase such ore and arrange for the stockpiles to be put in containers, or to a Banjamasin port for export. After several years, much of the easily obtainable surface rocks were gone.

The constitutional court transcript of the government’s case to retain the raw ore export ban (Decision No. 10/PUU-XII/2014) included national statistics on iron ore (sand & rock varieties) production at 2006 = 0.24 mill ton (mt), 2007 = 1.8mt, 2008 = 4mt, 2009 = 5mt, 2010 = 4mt, 2011 = 12mt, 2012 = 10mt, 2013=19mt and 2014 expected to be 7mt.

In 2012 many investment programs for expansion of mining and development of smelters were planned. In 2013 the Ministry of Trade & Industry had registered some 31 companies to export around 18.9 million ton of raw iron ore for 2013 with world prices around US$ 130 per dry metric ton. The Dir Jen of the manufacturing industry (Benny Wahyudi) estimated Indonesian steel consumption in 2012 was 10.5 million ton, and estimated 2013 would be 12 million ton, with domestic production comprising 6 million ton and imports of 6 – 7 million ton. In 2012 Indonesia imported steel mainly from China, Singapore and Japan with a value of around US $ 13.4 billion. The Dir Jen of Industrial Manufacturing (Budi Irmawan) encouraged national companies to build smelters to increase the value added of Indonesian iron ore mines.

Krakatau Steel Tbk (KS) imported all its raw feed as iron ore pellets, as it found local suppliers of raw iron ore were inconsistent about delivered quality, quantity and delivery schedule. The Krakatau Steel Group developed a strategy to be a more competitive steel producer through opening local iron ore mines and upgrading the ores at its sponge iron facility in South Kalimantan to replace about 55% of its feed imports. PT. Meratus Jaya Iron & Steel (MJIS) was formed as 66% PT. Krakatau Steel (off-take) and 34% PT. Antam (mining).

MJIS completed construction of its Sponge Rotary Kiln (SRK) in early 2013 for a cost of US $ 142.3 million. The kiln has 2 units, each of with an output capacity of 21 ton/hr for a capacity of around 315,000 ton per year. MJIS employs about 200 staff, of which about 55% are locals from the Tanah Bumbu District (South Kalimantan). The initial ore feed was laterite from PT. Sebuku Iron Lateritic Ores (SILO) with a typical feed of 53% Fe and sponge of around 80% Fe. Tests on alternative lump ore with feed grade of 62% Fe may yield a product of 86% Fe. In March 2013 MJIS shipped an initial 5,000 ton to Krakatau Steel to replace scrap iron feed. In July 2013 PT. Krakatau National Resources (KNR), a subsidiary of PT. Krakatau Steel (Pesero) Tbk, shipped 8,000 ton of ore from Padang to MJIS. The SRK is powered by 2 X 14 MW power plants that also provide electricity to the Batu Licin area.

PT. Delta Prima Steel (DPS) experienced about 2 years of delays before it could start production in 2013 at its Tanah Laut plant (South Kalimantan). DPS run 2 X 175 tpd of Direct Reduction Iron (DRI) kilns with output of 100,000 tpy. The US $ 26.9 million plant is from India and designed to produce sponge iron for the Indonesian and export markets. The plant engages about 60 experts plus a labor force of mixed Indian and Indonesians. After about 2 years of training it is expected to replace many of the Indian experts with Indonesians.

Mandan Steel, a wholly owned Indonesian subsidiary of Hong Kong listed company (CNR Holdings) made an agreement with PT. Batulicin Steel for the development of a steel mill, with a ground breaking ceremony in July 2012. Stage 1 is to relocate production equipment from China plus add new equipment with a schedule for completion in 2014. The expected capital for development is US$ 150 million for a production of around 360,000 ton of hot molten iron, 360,000 tonnes of steel and hot steel rolling capacity of 700,000 ton. However during 2014 the group’s ore trading business encountered the Indonesian raw ore export ban and a decline in metal prices. The export of iron – nickel ores from PT. Yiwan Mining slowed in 2014 wherein the temporary ore export license was accompanied with a price increase from US $ 16/ton to US$ 23.5/ton.

In 2013 several other iron and steel companies were reported to be in various phases of looking to establish in South Kalimantan, including PT Saber Steel, PT Tri Agung Mine, PT Semeru Surya Steel.

The raw ore export ban of January 2014 effectively killed the iron ore export industry. The supply of iron ore from various Indonesian mines was not of suitable quality, nor consistent in quality or delivery schedule, resulting in a shortage of supply to the Indonesian iron ore smelters. The global decline in iron ore and steel price has dramatically changed the economic viability of the smelter and steel industry. Indonesian government supply and construction contracts for steel components are awarded to the lowest bidder, wherein imported products often win out. In response to such industry downturn some 25 companies formed a smelters association in 2015 and approached the government for support. The associations steel smelter companies are PT Krakatau Posco, PT Meratus Jaya, PT Sebuku Iron Ores Laterictic (SILO), PT Krakatau Steel (Persero) Tbk (KRAS), Gunung Steel Group, and PT Delta Prima Steel.

One miner’s story.

A typical story of an iron ore project was that of an Asian firm entering South Kalimantan in a Joint Venture with the local government company (Persuran Daerah = PD) that controlled a number of IUP’s. In 2010 the private party invested about $10 million to undertake contract mining and transport (using local contractors wherever possible), employed 20 staff and engaged 30 mining contractor skilled workers. Their target was to undertake ore sales for export and domestic markets. In return the PD received a tonnage fee and arranged to pay royalty etc. Land compensation was arranged through another tonnage fee plus a Village tonnage fee. Local road fees were charged along the local roads to the public highway. Further fees along the 150 km public road for each of the 3 districts were provided to the local community leaders and such influential people each time the limited 10 ton trucks made delivery arrangements to the MJIS smelter. Typically such deliveries may be around a few hundred tons to 1,000 ton over 3 days, and then stop until the next shipment could be arranged. Total mining costs were relatively high for the hard primary ore that needed to be mined with hydraulic jack hammers, crushing and magnetic separation. The price of iron ore was initially quite good at around $80/ton, but prices declined to $68/ton before mining operations stopped. Unfortunately the needs of the MJIS smelter were on and off, reflecting the capability of the smelter to get contracts to sell their product to Krakatau Steel. Overall this mining company was operational for 4 years, but the stop – start nature of ore sales resulted in about 50,000 ton supplied to MJIS over 2 years. The operation was closed down when MJIS stopped buying iron ore from this local miner, and by that time (2014) it was not possible to export such iron ore. This Asian company could salvage a few of the moveable capital items, but most of the site infrastructure was soon stolen.

I have seen throughout Indonesia a number of variations of this business model of small scale mining in minerals and coal.

EITI and the reconciliation of income from iron ore mining.

The coordinating minister for economic affairs issued the EITI Indonesia report 2012-2013, wherein PT. Yiwan Mining of South Kalimantan is the only iron ore mining company included in this nationwide report for 2013 (not included in 2012). In 2013 PT. Yiwan Mining reconciled royalty was US$ 2.474 million, though apparently no profit tax was paid. Other revenues included land rent, local taxes and levies, corporate social responsibility, and forestry fee of Rp 4,341 mill and US$ 322,000. The EITI report does not provide production details, nor supporting data on commodity prices. The tabulated government royalty for iron ore concentrate is 3.75% of selling price.

Yiwan Mining started mining in 2007 in South Kalimantan with 123 employees and a long term export agreement. In 2011 a Hong Kong listed Chinese firm proposed to acquire 80% equity for $266 million to secure a reliable source of nickel – iron ore.

The lateritic iron – nickel mine is subdivided into three distinct layers, which include the Iron Cap (B1), Mixed layer (B2) and the Saprolite layer (B3): The Iron Cap (B1) layer is characterized by a high Fe content and low Ni content. The mixed zone (B2) is typically bluish green which is different from the overlying Iron Cap with a lower Fe content and higher Ni content. And the underlying Saprolite layer (B3) is generally characterized by a decreased Fe concentration (<38%) and higher Ni content (>1.8%). In 2012 their production capacity was rated at 3 million ton per year.

In January 2014, the raw ore export ban restricted Yiwan Mining exports and forced China Nickel Resources to halt operations at almost all of its core businesses, including a special stainless steel and nickel-chromium alloy plant in central China’s Henan province, as well as its nickel smelter in east China’s Jiangsu province. Both Yiwan Mining and the Chinese plants were closed down in 2015.

The South Kalimantan smelters.

Meratus Jaya Iron & Steel (MJIS) is a joint venture between PT. Aneka Tambang Tbk (AT) of 34% and PT. Krakatau Steel (Persero) Tbk (KS) of 64% for the development of a sponge iron plant with rotary kiln in South Kalimantan. The plant has a capacity of 315,000 ton sponge iron with planned investment cost of US $ 150 million, and longer term expansion towards steel making and acquisition of iron ore mines to ensure ore feed supply.

Information from the annual reports of KS shows that the MJIS asset was valued at US $ 142.3 million in 2013. The MJIS project fits with KS “strategy of buying intermediate product as raw materials for downstream mills.” However in 2014 the KS steel production was hit by several factors including, the sharp decline in steel prices, invasion of imported steel products, suspension of various oil & gas piping projects resulting in an overall 2.33% reduction in steel production from 2.27 to 2.21 million tons. The 2014 report identified raw material scarcity as one of the company’s risks and recommended to maximize the MJIS project. The report also highlighted the risk of “new government policies that may inhibit and create business competitions at all production chain (starting from raw material procurement to the distribution and sale of products)”. The report also mentions that MJIS obtained some investment credit facilities of Rp 501,347 million and Rp 275,236 million with an interest rate of 9.75%.

Information from the annual reports of AT show that the MJIS cost of investment was Rp 176,894 million. The project is assigned the commissioning phase in 2012 & 2013, with AT providing further short term operational loans to MJIS of Rp 33 billion. It would appear that MJIS made a modest Rp 1,000 mill profit in 2013, but a loss of Rp 200 mill in 2014. In 2014 AT referred to the project status as “provisional stage” and was in the process of securing continued supplies of iron ore. In 2015 MJIS referred to the project status as “development phase” and appeared to make a loss of Rp 248, 471 mill, bringing the project overall performance to an Rp 204,576 mill loss. None of the annual report mention the tonnage of sponge iron produced. The report states “As at December 31, 2015, the operation of MJIS is temporarily shut down, due to MJIS decision to re-evaluate target market of stainless steel sales in order to achieve optimal profitability”.

Government push towards smelters.

The constitutional court transcript of the government’s case to retain the raw ore export ban (Decision No. 10/PUU-XII/2014) provides an insight to the government’s intentions regarding the raw ore export ban and associated legislation to support the development of smelters. Selected extracts of the government’s case include the following (Google translate);-

· “The government argued that the policy of Value Added in Article102 and Article 103 of the Mining Law and its implementing regulations will be very beneficial and will cause double effect (multipliereffect) of the economy,among others increased revenue and increased employment at the smelter in the domestic industry. In addition to considering the potential of the metal in Indonesia, with the policy of increasing value added through the obligation to carry out the processing and refining of minerals in the country, theore/iron ore,copper ore,bauxite(aluminum),nickel ore can be used as the basic raw material of strategic to support national strategic industrial mineral based”.· “Furthermore,in the medium and long term it is predicted that state revenues from mineral products in 2013 amounted to 22.04 trillion and in 2014 will decline to16.48 trillion (74.8%) but in 2017 there will be a surge in revenues to 43.70 trillion (198.2%)”.

The push towards smelters was accompanied by various seminars where proponents rationalized Indonesia’s total tonnage production capacity and predicted future needs (with growth around 6 %). Market factors were not well represented in such seminars. The Jakarta Post (8 Sep 16) article “steel industry growth hindered by imports” highlights Industry Ministry Dir Jen of metal, machinery, transportation equipment and electronic industries, Mr Suryawirawan statement “State electricity company PLN and upstream oil and gas regulatory special task force (SKKMigas) need to open up their plans to local firms and hold tenders on time so that the industry knows what kind of steel they need to prepare. Also, don’t change your specs suddenly to ones that locals aren’t able to produce”. This statement reflects the marketing factors that Indonesia’s need for steel should not be treated as a total tonnage needed, but broken down into the many types of steel. In another seminar socializing the new rail law, the proponents indicated new steel rail may not be imported, but locally sourced, however discussion revealed that Krakatau Steel could only produce light rail, and not heavy duty rail. Mr Suryawirawan’s statement also indicates the delivery schedule for the different types of steel and other metals is an important marketing factor. At one point when I was constructing a mine I had to place an order at a local factory for a particular thick type of copper cable for the coal process power plant, and was asked to wait 6 months for its scheduled manufacture.

Conclusion.

It is apparent the State Owned Enterprises (SOE’s) of Krakatau Steel and Aneka Tambang were encouraged to actively support the government’s smelter plan, and in so doing, encouraged the development of many private iron ore mines. It is clear from the history of development, as outlined above, that the effective closure of the South Kalimantan iron smelter program has lead to the closure of iron ore mines, and overall has failed to meet the smelter program’s stated national objectives. The actual outcome is increased state liabilities, less state revenue, less employment and no strategic support of the national mineral based industry.

A geologist preparing a JORC resource and reserve report is required to comply with various professional standards that reflect a scientifically justifiable and transparent process in making conclusions on the viability of the project. The writer of this article has not been able to find the various appendixes to support the governments scientific arguments related to constitutional defense of the raw export ban, nor has the writer seen the MJIS feasibility studies on the smelters built by the IDX listed SOE’s. The significant negative impact of the MJIS project to the broader mining and smelting industry suggests greater transparency and justification of such programs are needed. Certainly the public companies corporate governance bodies, the IDX and various government ministries monitoring such programs may need to be more vigilant and transparent.

Krakatau Steel is facing competition for its steel products from cheaper imports, and from the Indonesian informal iron smelting sector. Government contracts are awarded on cheapest price, as we have seen recent gas pipelines being awarded to the Korean contractor that can achieve cheapest price in part by importing Korean steel pipe. Indeed much of the national infrastructure development program is accompanied by imports of cheaper steel products. Local housing builders often use non-standard iron and steel components produced by small companies that do not necessarily follow the strict regulations on wages, health and safety etc. If the major Indonesian steel makers cannot sell their products, then they don’t buy sponge iron, and thus mining stops. It is clear that stronger coordination is required from the ministries managing construction, smelting and mining etc.

The traditional forms of small scale mining, transport and smelting tend to be a cash and carry business, wherein royalties and taxes may suffer, but local business and influential people may win out. The Mines Departments program on insisting on C&C, and to develop a further 1,000 mines inspectors is certainly a good move to bring some of these “informal business” into the formal business sector. EITI needs to be more robust to include sales tonnage and price to enable greater transparency on royalty and income tax. Certainly the EITI inclusion of only one small iron mine (from national production of 13 million ton) has not adequately portrayed transparency in the mining industry.

Under the Suharto regime it was decided to apply Value Added to the burgeoning rotan (cane) industry. At that time many remote villages could earn money by growing and cleaning the cane, local transport delivered the cane to ports that exported container loads to Singapore and elsewhere. A small cane furniture industry had developed in parts of Indonesia. The government plan was to stop raw cane exports and add value by making and exporting cane furniture. However the local cane furniture manufacturers did not have enough trained human resources, and did not have any international marketing experience, and finally a container of made up furniture could only take a few bulky items, that was far too expensive compared to a container full of raw stacked cane. Overnight the cane industry collapsed, nearly killing some isolated cane growers. To this day the rotan industry has not fully recovered. It seems the government has not learnt by its past mistakes.

Recent news reports (August 2016) indicate that not only iron ore, but other commodities raw ore and smelter programs are failing, with 26 smelters now stopped. The government has much data on mining, smelting and sales of all mineral commodities, since the implementation of the raw ore export ban. It is imperative that the government undertakes an independent and transparent review of the raw ore export ban before more Indonesians suffer unemployment, the SOE’s makes further losses, and the nation’s tax revenues continue to decline.