More talk, less work [Coal Asia Vol 61 Nov-Dec 2015]

coal-asia-november-2015

More Talk, less work

The ESDM recently published (26 Sep 2015) a document [Langkah-langkah pernataan dan perbaikan sektor energi dan sumber daya mineral (ESDM). Catatan Pada Peringatan hari jadi pertambangan dan energi ke-70.] warning of a pending crisis in the petroleum, coal and mineral industries, particularly as exploration and development to replace depleted natural resources, and electrification, are not keeping up with national growth. The ESDM have undergone a manpower revision, acknowledges that regulations need to be improved and the ESDM recognizes the importance of being more consultative with all industry stakeholders. There have been a number of NGO groups, newspaper and social media items discussing the status of the industry, while many production figures are declining and more are losing their jobs and professional careers. I have attended just a few  meetings and observed some of media reports.

The Indonesian Association of Economic Geology (MGEI) held a meeting (27 August) wherein some of those attending represented captains of the geological profession. The meeting touched on a wide range of topics, including data compilation and ethics. There was concern that the national fuel subsidies were unsustainable, as income from royalties is less than expenditure on fuel subsidies. Indeed the Jakarta Post (8 October) reported the 2014 national income from royalties at Rp 240,848,282.407,860 with outgoings of natural resource revenue sharing fund at Rp 62,001,317,675,508 while expenditures for subsidies is Rp 391,962,514,288,102 (which I may assume much of the subsidies is for oil, gas & electricity). There is general concern that the pool of geological talent is dissipated during such industry downturns, and some recommended the Government may assist by developing employment programs to synthesize and review the wealth of geological data reported by the thousands of IUP’s and many COW’s. There was a strong consensus that the Government presently gives no priority to exploration, does not acknowledge the importance of exploration and does not realize that exploration is required to be stimulated now in order to accommodate the lead time for future developments to support Indonesia’s long term growth.

The Indonesian Mining Exhibition (9-12 Sep) was quite different from past years, with a very strong contingent from China, some notable stands from Germany & Korea, with a notable reduced number of Australian stands. Perhaps this reflects the shift in emphases of investors into the present Indonesian mining industry. Of significance was the noticeable lack of Indonesian players at the exhibition, particularly some of the big miners were absent, probably reflecting the tight financial situation was more important than a show of national support for the industry in general. Also of significance was the virtual lack of exploration focused stands, indicating that most exploration contractors and consultants feel that there is no present justification for this style of exhibition to promote their business. A week later the Indonesian Electrical Exhibition reflected a similar dominance of China parties. Although the exhibition was to focus on alternative energy, there were plenty of diesel power units, and very few stands on wind, hydro & geothermal power where geological and geotechnical input would be required. Again there was a distinct lack of Indonesian players, and PLN’s stand was low keyed. Perhaps PLN felt this exhibit was of limited effectiveness in publicizing its 35,000 MW new power plans. There were a few stands promoting the servicing of existing PLN power plants, and this may become a more critical industry, as many of Indonesia’s power plants and distribution networks are approaching, or past, their “use by” dates.

The Ozmine seminar (7 September) provided some indication of how the exploration and mining industry may be turned around, though acknowledged this may be some time in the future. The commodity cycle is driven by demand and supply, with the present over supply reflecting the success of the exploration and mining industry along with slowing growth that partially reflects government’s limited success in managing their economies. Typically the commodity cycle will return to upswing when the lower cost commodities (low strip ratio coal, high grade ores) are consumed, and ongoing demand will raise prices to justify higher cost commodity extraction. A personal example of this was seen in coal mining in South Kalimantan. Older mines were abandoned at a strip ratio of around 3:1 when the price of 6,000 KCal coal was around $21/ton, but the latter price increase to $50/ton allowed mines to be restarted with strip rations of around 7:1, and when the coal price peaked at $80-100/ton then mines were redesigned with strip rations of 11:1. With the recent price drop, many such mines are now closed. The Ozmine seminar pointed to several factors to turn the mining industry around, including a) ASEAN population statistics point to a growing young consumer bases creating demand for products, b) numerous high cost mines are closing reducing excess supply, c) new power plants will drive demand, d) Government terminating non performing tenements to initially reduce some supply aspects, e) some new industries, including smelters, will drive demand for more power and additives etc. Those who are well positioned will take full advantage of the turnaround, particularly some Indonesian conglomerates, China and other parties with funds.

Exploration Mining Development (EMD) Indonesia seminar (29 September) covered several topical subjects [ www.emdindonesia.com] . The development of the Minarba One Map Indonesia (MOMI) is progressing. Certainly this map will stimulate exploration and it is a shame that some elements of its public release will not be sooner than late next year. The excellent legal overview (Bill Sullivan) reflected on mixed signals of the government supporting reform, but implementation often increasing obstacles. The scheduled next national elections of 2019 will likely provide a target date for realizing an early stimulated employment profile for the smelter & mining industry, in turn emphasizing the present need for exploration. Malcolm Baillie mentioned a number of points for a draft submission for a review of the mining law.  This submission is designed to emphasize the nature of exploration as distinct from mining. Some points brought forward include; 1) an emphases that exploration has an immediate benefit for the local population, 2) that the moratorium on new tenements has been going on for 6 years and is killing the exploration industry, 3) that exploration expenditure in Indonesia is significantly down on past years, 4) that the level of exploration is far below that needed to replenish Indonesia’s reserves that are consumed by mining, 5) that there is no need to impose local equity on foreign explorers until the construction / production phase, 6) there are too many levels of government and too many permits, 7) inactive exploration tenements should be terminated to allow for turn-over of exploration ground, 8) processing / smelting obligations are one-size-fits-all approach, wherein there should be room to consider the unique mineral nature of each deposit.

Ernst & Young (EY) latest annual report [Business risks facing mining and metals 2015-2016] analyses and ranks the top business risks in the global mineral and coal industry. “Mining and metals companies that best understand the risk scenarios and potential impacts on their businesses are better positioned to manage these risks and seize strategic opportunities”. The report acknowledges most mining companies are focused on survival strategy for the next year or two. However, other companies are looking at growth opportunities, to position themselves to be leaders in the next upswing of the metal and coal markets. One current trend is a drastic reduction in exploration across the industry in 2013 – 14, indicting a future supply shortage and thus a return to a commodity upswing. Furthermore, some mines are exhausting their economic reserves, raising concerns over these companies future performance. Also, there are few brown-field opportunities available. Companies need significant capital when looking for growth through mergers and acquisition or to develop their company vertically (coal companies becoming power plant owners). One cost minimizing option is to invest in green-fields exploration, where choosing the right target and engaging experienced exploration managers will reduce the exploration risk. Greenfields exploration takes time to deliver results, and thus such exploration should start now. The EY report goes on to look at funding options for exploration.

PERHAPI has been invited to the DPR to provide input and recommendation of the revision to the Mining Law. Communication with a Head of Mining Law Revision Team of PERHAPI, Ms. Eva Armila mentioned “Our recommendation is to revisit the existing Mining Law comprehensively with holistic approach from all aspects rather than just a political fix. IMI has done its scientific research and found issues on impediment of the growth of our mining sectors. Departing from valid issues we found, couple with analysis on every single article in the current Mining Law, we arrive at a proposal of revision to the existing Mining Law. Until now PERHAPI and IMI have conducted 2 Forum Group Discussions by inviting experts in various areas and one Workshop inviting the government, parliament, relevant associations and other stakeholders. The purpose of the Workshop was to receive response and input from stakeholders. We would certainly appreciate any input and comments from any stakeholders on our revision so long it is supported by valid and scientific reasons.  The revision itself is purposed to create a robust regulation as such will provide more certainty for mining business players and to lift as much burdens as possible of the mining rights holders at the same time to strengthen the government function as regulatory body, to support the national plan and eventually to provide ample benefits for the people of Indonesia. The main change to be proposed is formation of the state owned company(ies) holding mining assets and acting as a party in mining contracts with other business entities. Early of next month (November) we plan to finalise the draft. The draft will then be submitted again to DPR and ESDM.”

Less Work.

During the Sukarno era the mining SOE’s objective was to adsorb employment, with such government jobs typically being single function activities that were suited for the relatively unskilled and uneducated work force, under the control of a few engineers. The attitude of the workers was similarly such that they were given jobs due to local influence, and some did not expect to work hard. A line from an old Hollywood movie refereeing to Russia seems to apply here – “The workers pretend to work, and the Government pretends to pay them”. One observed example in the 1970’s where Bukit Asam was advised to advance the coal rail head closer to the mine, and thus improve productivity through the reduction of labor. However one BA manager refused on the excuse of the need to employ local people, but also he was apparently receiving a kick back from the labor contract. Aneka Tambang’s underground gold mines of Cikotok were kept running at a loss for a number of years simply to retain a core set of underground mining engineers and skilled operators, and were “rescued” from termination when the Ponkor mine opened up. Another historic example was PT. Timah that had opened a porcelain factory to use the waste clay and create employment for the wives of the mine workers. This emphasis on adsorbing manpower changed when Kuntoro was directed to revitalize PT. Timah and thousands of jobs were cut. The introduction of the Contract of Work system to privatize the mining industry was also a new beginning of building a skilled and responsible work force.
The recent financial crisis that started towards the end of the SBY presidency and continues today has seen the most recent mega shift in the mining manpower scene. To survive, the mines need to improve productivity through manpower efficiency. No longer is it two men for one job (say tire changer and assistant), but it is now typically one man for two or three jobs. Fortunately the recent history of better basic education, and training at mine sites has enabled a number of workers to be multi skilled. Indonesian manpower productivity can now begin to compete with its international industry competitors. The present commodity crisis has also provided some mines with the opportunity to shed some nepotism dead-wood, while others are questioning how to revise their security manpower, government reporting and other such non-core manpower. In some cases the deliberate slow down of production to match limited sales is accompanied by the reduction of overtime, or reducing shifts.

The mining unions were largely defeated during the latter phase of Suharto’s period, and the massive layoffs from the raw ore export ban saw no effective coordinated labor response. Indeed it was the companies affected by the raw mineral export ban that appealed through the court system to stay open and continue to provide employment. Today, some mine workers are aligning themselves with the companies to work harder as part of the team effort for the company and its work force to survive. However the government does not seem to fully appreciate the mine labor situation. For example the new labor requirement for the pension plan is a further cost to the company. While such pension plans are certainly in the workers best interests, there is no additional income or relief for the company and ultimately the extra costs may be offset by further reducing the workforce.

Smelter Jobs. The Jakarta Post (16 Sep) article on China investment in Indonesia states “It seems about 1,700 Chinese laborers and 700 engineers have been working on a number of construction sites, while some 26,000 Indonesian workers have recently been dismissed because of the economic downturn. This could be just the tip of the ice-burg.” It is assumed a number of such Chinese laborers and engineers are constructing the nickel smelters in Sulawesi, and possibly an underground coal mine in South Kalimantan.  Prof. Dr. Yusrilhza Mahendra, Expert witness statement supporting the government’s Constitutional Court case to effectively retain the mineral export ban implies the effective raw export ban would create more jobs for Indonesians. It would be interesting to get some idea of the number of professionals and non professionals who lost their jobs due to the stopping of raw mineral exports, and those who have gained employment due to the smelter program.

AusIMM report on employment. I am not aware of any surveys on employment in the Indonesian exploration and mining sector, and look to the recent (June 2015) AusIMM employment survey that was completed by 2,266 of its 14,200 members for a trend that may be reflected in Indonesia. Note there are some 230 AusIMM members in Indonesia. The AusIMM survey key findings show “a) the unemployment rate for all AusIMM members is 15%, being three times the Australian national unemployment rate, b) Minerals production roles, including mining engineers, metallurgical engineers and geotechnical engineers, have faced the largest year-on-year increase in unemployment [although geoscientists were the first groups affected by the downturn]. c) Employment volatility is increasing and opportunities decreasing: 16.4 per cent of mining professionals have been made redundant, and 18.3 per cent of employed mining professionals have changed employers in the last year. d) Almost 30 per cent of unemployed mining professionals are now long-term unemployed [that is, unemployed for 12 months or more], with new graduates being most severely affected. Many are seeking employment outside the mining industry”. There are some differences between Australia and Indonesia, with Indonesia having a larger employment pool with the petroleum sector while Australia has more in the minerals sector. However the Indonesian petroleum sector is experiencing a significant decline in exploration, and the mass closures of nickel and bauxite mines may suggest Indonesian professional unemployment pattern may be similar or worse than Australia. Note that Indonesian statistics of 2014 indicate a population of around 250 million with the formal work force of 121.9 million, with 114.6 employed and 7.2 million unemployed. About half the population is under 30 years of age reflecting the growing influence of the young work force.

Push & Pull. During the Ozmine panel discussion on supplying Indonesia’s energy needs, one line of discussion brought out the shifting negotiating position over commercial terms for the IPP program. Earlier the Government tried to negotiate a tough position with numerous competitive bidders for each proposed power plant site. However the national emergency to get these power plants started became a political concern that has now placed PLN in an urgent / weaker position, as the bidders are being more firm on seeking a better financial deal. We may speculate a similar situation regarding the ongoing delay in delivering a revised mining law and restarting the issuance of new concessions. The longer the government takes to finalize these laws, wherein the lack of exploration investment and prolonged unemployment may contribute to a lower national GDP that in turn may require the new laws and regulations to be friendlier towards the investors.

Conclusion.

There are many industry seminars and media publications along with formal submissions (PERHAPI & EMD) for which the ESDM and Commission 7 can access to improve their communication with all exploration and mining stakeholders. It is good that a comprehensive review of the mining law along with computerization of the tenement system is in progress. The ESDM publication’s definition of nationalism gives further encouragement that free enterprise will not be trampled upon as was suggested by recent Constitutional Court decisions on the water law etc. The longer it takes for the new mining law to take effect will likely place further emphases on the private industry to be part of the solution to improve Indonesia’s GDP, and thus some of the implementing regulations may be more supportive of private industry. However the new law is urgently needed to stimulate employment in the exploration and mining sector. Unemployed & underemployed professionals of high caliber cannot wait too long before seeking employment outside the industry, perhaps more will follow the geologist Ahok’s career path and enter politics!

Published on Coal Asia Vol 61 Nov-Dec 2015

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