Indonesia strategy:Mining and energy policy updates

Event

We were invited to a presentation and discussion with the acting Minister ofEnergy and Mineral Resources Mr Luhut Pandjaitan and team, concerningseveral pertinent government plans in the energy and mining space inIndonesia. Mr Pandjaitan is a senior Coordinating Minister in the governmentand the President’s former Chief of Staff.

Impact

Sticking with the export ore bans on nickel and bauxite. The governmenthas concluded that back-tracking on the ore export ban would act as adisincentive to investment in the downstream mineral processing area and isnot in the national interest. So far, US$5.2bn has been invested in 22 nickelpig iron smelters post the 2009 mining law, with the government expectsIndonesia to contribute c.15% of global stainless steel materials trade from2017. Two alumina refineries at a total investment of US$1.5b are incommissioning.

Lower gas prices to help industry competitiveness. The governmentcontinues to focus on lowering industrial gas prices. In a low oil priceenvironment, Indonesia’s domestic gas prices are uncompetitive globally.Lower upstream prices and efficiency gains through reducing transmissionand distribution charges are both being sought with current prices of US$8-14/mmbtu targeted for reduction to c. US$6/mmbtu.

Working on increasing investment in oil and gas. Indonesia has rankedpoorly for oil and gas investment attractiveness, and the government iscurrently seeking to simultaneously balance lower fiscal space on costrecovery and attracting new investment through incentives. A positive changefrom prior policy making, incentives for upstream producers are beingdesigned in consultation with key industry players and the IndonesianPetroleum Association alongside changes to the law on cost recovery. Largeexisting projects being developed is the key objective, with Inpex’s Masela,ENI’s Jangkrik and Chevron’s IDD projects a key focus.

Outlook

Consistency and industry consultation on policy moves are important, in ourview. In hard commodities, Indonesia is a major commodity producer fornickel, tin and thermal coal. A member of OPEC until 2003, the countryproduces less than half its peak oil production reached in 1995 due to poorpolicy settings over the past decade.

Indonesia’s largest gas distribution company is Perusahaan Gas Negara,57% owned by the government of Indonesia. Its 1Q16 accounts showed itearned a gas distribution spread of US$2.8/mmbtu, above the weightednational industry average of US$1.5/mmbtu.

The largest listed nickel producer and exporters are Vale Indonesia andAntam.

We continue to be cautious on the JCI through to year-end with the tailwind ofgovernment spending slowing during 4Q16 and a relatively successful taxamnesty outcome already appreciated by investors.