SAIL digs into Indonesian mines amid uncertain regulatory regime

Will set up manufacturing facilities in the country in return of direct allocation of iron ore.

While most infrastructure companies are struggling to make a mark in sourcing raw material from the mineral hub of Indonesia, public sector steel major SAIL has gone ahead pulling off a strategy securing major mineral reserves in that nation, in the middle of a highly uncertain regulatory environment.

SAIL is on the verge of securing major coal and iron ore mines allocation in Indonesia as part of its overseas expansion plans. The idea is to set up steel manufacturing facilities in mineral rich nations in return of direct allocation of iron ore, coking and thermal coal mines and import surplus mineral production back home.

The company has firmed up plans to erect a steel-making plant of 3 million tonne per annum (MTPA) capacity in the Central Kalimantan region. With a memorandum of understanding (MoU) signed with the Indonesian government in January this year already in place, SAIL is hopeful of securing a thermal coal allocation soon.

“We have already applied for a mining lease in Central Kalimantan. Currently, geologists are surveying the mines. The exact location of the site will be identified in four-six months. Overall investment in the project would be in the range of Rs 13,530 crore ($3 billion),” Chairman C S Verma told Business Standard.

He said whatever surplus gets generated in the captive mine would be brought to India. “It would be premature to talk about reserves or surplus as we are yet to zero in on the location of the mine,” he said.

The company has already set up an office in Jakarta for coordination both at the level of federal government in Indonesia as well as with the Province of Central Kalimantan (PGCK). A leading consultancy firm is being mandated for selection of a “strategic partner” for the Indonesian project, both for the steel plant as well as mining activities.

Experts, however, believe the success of securing captive mines abroad would depend largely on the agreement between the two parties on interpretation of the new regulatory changes. “It would be a good move if the Indonesian government assures that export of surplus production to India would not attract additional cost flowing from the regulatory changes. This compensation, though, seems unlikely,” said Amrit Pandurangi, senior director at Deloitte Touche Tohmatsu.

The Indonesian government had announced a move to align mineral exports from Indonesia to global benchmark prices as one of the “implementing regulations” which followed that country’s new law on mineral and coal mining, ratified in 2009. The move was a response to the concern that the nation was losing its mineral wealth to other countries at cheaper prices.

According to regulation, Indonesia’s ministry of energy and mineral resources would set a benchmark price for coal and metallic minerals like iron ore. It will be updated monthly according to prevailing market prices based on basket of recognised global and Indonesia mineral indices. The benchmark price will serve as the floor price for royalty calculation.