Coal is not a Black Diamond [Coal Asia Vol.56]

Coal is not a Black Diamond.

Introduction.

There is a growing number of Indonesians who complain that not enough is being done to extract the maximum benefit from the mining industry for the benefit of the Indonesian people. This article takes a brief look at the international diamond industry, wherein Indonesia may be reminded just how fortunate they are that today’s mining industry developed from the Contract of Work system with responsible captains of industry and mature government officials.

Indonesian Diamonds.

In the late 80’s I undertook a geological survey for an Australian junior explorer into the diamond fields of East Kalimantan. I flew to the area by helicopter, that allowed me to view the lay out of the area, and jumped out of the hovering helicopter to commence the ground work. Over the next few days I worked alone, walking from one small group of local miners to another, and slept rough. The local diamond miners were welcoming and eager to show me their diggings and diamonds. After a few days I realized this was not the geological target suited for the investors, and walked out to the nearest hamlet, hired an ojek that sped me along narrow foot paths for several hours until I reached the Mahakam river, and a small house port. I arranged to catch the ferry that would take 2 days to reach Samarinda, but fortunately I was able to hitch a ride with a fantastic fast speed boat with the forestry inspectors, and made it down in less than a day.

Many years later I visited Indonesia’s only commercial alluvial diamond mine PT. GaluhCempaka Diamond, just outside of Banjarbaru in South Kalimantan. Their open pit “dry mining” operation was going well despite the unique mining challenges of mining through very thick swamp.Their modern process plant was producing diamonds with minor gold etc. One of their challenges was to assist the government in understanding the diamond industry, particularly in the aspects of international marketing and sales. It would seem the difficulty of exploring for such buried alluvial channels was eventually too much for this enterprise. At the same time as this mechanized and authorized mining was active, the nearby local mining of alluvial diamonds continued, and Matapura developed a wide reputation as a gem market in Indonesia. I visited a number of these local alluvial diamond sites, and was amazed at the risks taken by some of the miners. In several swamps men hand dug a circular shaft up to 8m deep and filled to the brim with muddy water with a wooden pole in the center. The miner would hold his breath and swim down the pole in complete darkness, and then dig the pay gravel out from under the sides of his shaft, up to the length of his arm. He would then return in the dark muddy water to the pole and pull himself back to the surface with a basket of gravel. There were a number who did not return to the surface. The gravel would be taken to a tent panning station where it seemed like a happy family event, wherewomen & children would first screen the gravel and then use home made deep conical wooden dulangs (pans) to swirl and shake the gravel to concentrate the diamonds at the bottom of the pan.

Smillie’s book on Diamonds.

This is a vastly different situation to that of the blood diamonds of Africa and other countries. In reading Ian Smillie’s book “Diamonds” he traces the history of the international diamond industry. The Kimberly Process of registering raw diamonds was develop in response to NGO’s concern that a number of countries where their extensive alluvial diamond fields were run by rebel groups seeking to overturn the legitimate governments. Later such conflict areas became the property of governments that in turn bled the wealth out for the elite rulers. In such cases it seems many people were killed, enslaved, miss treated with vial disregard for human rights. The Kimberly Process is the voluntary agreement by diamond producing, cutting & polishing and trading countries to certify parcels of rough diamonds. It works well in some countries, but not so well in other countries. Smillie’s book is a reflection of his personal close involvement with the diamond industry and in particular with the development and operation of the Kimberly Process. Some of his reflections are important lessons for the wider mining industry, such as “There is a basic truth; when regulators fail to regulate, the system they are designed to protect collapse”. Smillie also makes the distinction that Russia, Canada and Australia are developed countries that appear to have well managed diamond industries, and at one point notes that Indonesia is registered with the Kimberly Process.

Smillie’s book gives a graphic account of bad people as owners, regulators and security that miss use their countries resources and miss treat the people for their group or personalbenefit. We have seen some parts of Indonesia heading in that direction. During the 80’s and 90‘s gold rush in Indonesia there were many accusations that the local government, police and military were initially compliant with illegal and environmentally damaging gold mining. Later some of these officials advanced to become the principals driving illegal mining.  During the more recent coal boom some local government officials, police and other officials became tempted with illegal coal mining and transport, and some are now under investigation or in jail.

I am sure there are many Indonesians who would feel that it may not be appropriate to compare civilized Indonesia with the human tragedy of Angola, Guinea, and Liberia etc. However Indonesia should not be too complacent, as stability in Indonesia is still fragile. I saw the two Dayak wars in Kalimantan, where the first, and more severe, war was partly the violent reaction of the Dayaks due to the government’s inability to control illegal alluvial gold mining that was impacting on local agriculture. More recently there have been bloody riots when village people thought their water supply might be compromised, even though the gold exploration company at the center of the issue was a good corporate citizen. We have also seen some local elite parties grab projects after the foreign party has spent their exploration funds and derisked the projects. If local powerful parties are to acquire exploration and mining projects with such aggressive methods, then it may be a short step for their management to conduct a less socially responsible management philosophy.

Smillie’s book on diamonds shows the growing importance and strength of responsible NGO’s, particularly as some of the countries and major international companies entering the debates on developing the diamond trade regulations had objectives to undermine the Kimberly Process. The power of the internet has the capacity to reach any countries population, and well-presented material can bypassbusiness and politicsand go directly to people as consumers or voters. Smillie urges the “diamond sector to start complying with international standards on minerals supply chain controls including independent third party audits and regular public disclosure”. Fortunately Indonesia is an active participant in the UN sponsored EITI that conducts independent third party audits of the major producers of oil, gas, coal and minerals. I remember in the 1970’s and 80’s that all news in Indonesia was the exclusive product of the government, with all radio stations switching over to the government station for news. I also remember that such news was often full of slow talking government officials reading out the record crop productions for various regions – but recalled that some of the numbers were actually less than the previous year. No listeners seemed to be bothered, as they understood such news was not reliable and that there was nothing they could do about it. In today’s interconnected world it is up to the various NGO’s to ensure the Indonesian government continues to meet its commitments for transparency regarding the implementation of the EITI program.

Smillie’s book also provides several basic concepts on value and commodity price. Adam Smith developed the “diamond – water paradox”, wherein water is very useful but is of little value as an exchange media, but diamonds have no uses and can be of great trading value. Other concepts of marginal utility and labor theory of value do not seem to apply to diamonds. De Beers acquired control over the majority of the rough diamond trade and thereby were able to control supply and prices. The chairman of De Beers is quoted “by controlling the price De Beers was protecting the consumer, ensuring that the purchase retained its value”, and “single channel marketing has exercised an extraordinary beneficial influence upon the whole of the diamond industry”. In the recent past Indonesia was a member of OPEC when it sought to manage the world supply and price of oil, and Indonesia has an ongoing attempt to control the supply and price of tin. The falling price of oil, iron ore and coal reflects an oversupply free market that seems to also reflect a competition for market share. If we follow the diamond story then the strategy may be that once the weaker competition is forced out, then the remaining limited suppliers may form a cartel and then control prices. However coal is not like black diamonds, and an increase in commodity price in a free market may allow mothballed mines to restart. The Indonesian government could intervene in this free market approach in a number of ways, however the recent nickel raw export ban shows us that another country will step into the restricted trading gap leaving Indonesia out in the cold. For a cartel to work, it’s partners need to be in control of most of the commodity, and for Indonesia to go down that path for tin or coal etc, then it needs its business leaders and diplomats to work in an exceptionally hard environment with other countries that have a stronger free trade outlook.

Indonesia’s outlook on free trade is sometimes mixed with a concept of self-sufficiency or self-reliance. There are some who may argue that Indonesia should not export its coal, but keep it for the longer term needs of Indonesians. This follows the traditional Dayak concept of panning for a little gold for whenever you need a little cash, and leaving the rest for your children and their children. A similar farmer’sattitude is that they don’t want to sell their land for fear their future generations will have no livelihood or sense of belonging to their traditional community.This attitude is in part what is holding back land acquisition for the development of mines or the nation’s infrastructure development etc. However Indonesia is full of variations, and a better life can be had through finding the right cooperation with progress. I attended a traditional Bali wedding and asked the village people seated by me of their concerns that the nearby lush rice fields were rapidly being converted into villas for rich weekenders or holiday hire. The old man dressed in his faded best batik outfit told me with a wink in his eye that they were “padibeton”(field of cement). It was then that I realized that a plot of rice field takes considerable hard work and only returns a minor income twice a year, and the owner may live some way off in a poor house. But a villa requires a live-in gardener cum guard with a wife as cleaner and cook, wherein each gets paid a monthly wage and live comfortably in the ample servant’s quarters of the magnificent villa.

Conclusion;

The poor human rights cases associated with blood diamonds remind us of where a mineral industry can go horribly wrong. A healthy mining industry needs transparency and good governance to deliver the full benefit for the Indonesian people.

Much of Indonesia remains asvillages in survival mode, while others are adapting and moving forward. The collective wealth from mining and other primary industries is needed now to be the foundation of the next generation of mostly urban Indonesians.