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Why the Indonesian State Took Majority Ownership of PT Vale Indonesia

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Pacific Money | Economy | Southeast Asia

Why the Indonesian State Took Majority Ownership of PT Vale Indonesia

There has long been a desire in certain quarters to eventually move ownership of foreign-owned and operated mines back into Indonesian hands.

Why the Indonesian State Took Majority Ownership of PT Vale Indonesia
Credit: Depositphotos

The Indonesian government recently became the controlling shareholder of PT Vale Indonesia, a mining company that has been operating in the nickel-rich island of Sulawesi for decades. The government, through state-owned holding company MIND ID, already owned 20 percent of PT Vale Indonesia and in February they completed a deal to acquire an additional 14 percent stake for around $275 million. With this move, MIND ID brings its total ownership in the nickel miner to 34 percent. Brazilian mining firm Vale and Japan’s Sumitomo Metal Mining now hold 33.9 percent and 11.5 percent, respectively.

Vale was originally granted a mining concession in Sulawesi in the late 1960s, when the Suharto government first came to power and was eager to open Indonesia up to foreign investment, especially in industries like mining. At that time, Indonesia largely lacked the capital or technical capability to develop large-scale mines without foreign investment.

But foreign companies profiting from natural resources taken out of Indonesian soil is, at the best of times, a complicated proposition. And there has always been a strong undercurrent of economic nationalism in Indonesia, and a desire in certain quarters to eventually move ownership of foreign-owned and operated mines back into Indonesian hands.

It would seem, that time has come. As discussed in an excellent new book by Eve Warburton, a pair of mining laws in 2009 and 2020 established a legal requirement that foreign-owned mines must divest majority ownership to Indonesian shareholders over a certain period of time. In the coal mining sector ownership has largely shifted from foreign to privately owned Indonesian firms.

But some mines arguably have greater strategic value, and in certain cases the government has taken the lead in the divestment process. For instance, in 2018 the government became the controlling shareholder of PT Freeport Indonesia, which operates one of the largest gold and copper mines in the world in Papua. Like Vale, a foreign mining company (today known as Freeport-McMoRan) began developing the site in the 1960s. Now the state controls 51 percent.

The divestment of foreign-owned mines reflects several trends in Indonesia’s political economy. Policymakers no longer want mines to export raw, unprocessed materials. Instead, they want to capture more of the value by having mined ore processed domestically in local smelters. And they want ownership and control in Indonesian hands. During the Jokowi era, the government has gotten shrewder in its negotiations with foreign mining companies and shown a real willingness to play hardball to get what they want.

Why did Vale agree to divest majority ownership in the Sulawesi mine? Besides the law requiring it, Vale’s mining permit was due to expire in 2025. Clearly, the government agreed to extend the permit on the condition that MIND ID become the controlling shareholder. And the government got what it wanted. Not that long ago, such threats might not have been taken seriously because the assumption was that domestic firms lacked the capital or were otherwise unable to invest in and run these mines.

MIND ID was created, in part, to address this. By consolidating various coal, aluminum, tin, nickel, gold and copper holdings into a single state-owned entity, MIND ID is able to leverage economies of scale and exercise greater control over key parts of the mining sector. The 2023 financials haven’t been released yet, but in 2022 MIND ID’s total assets stood at $14.6 billion, including $1.5 billion in cash, with after-tax profit of $1.4 billion. That’s sufficient to, for instance, purchase a controlling stake in a large, foreign-owned mine without stretching the balance sheet too far.

The other reason the government wants more control of certain mines is due to their strategic role in global supply chains. Nickel has been a big story in Indonesia, as it is used to make lithium-ion batteries, and demand is projected to rise as clean energy transitions kick into high gear. Indonesia, which has the world’s largest nickel reserves, has been using export bans to force foreign firms to build smelters in Indonesia and process the ore domestically. Now they are stepping up their direct ownership of big nickel miners like Vale, probably in an attempt to exert more control over the trajectory of the industry.

There has been a tendency in the past to assume such bouts of resource nationalism are temporary, that given some time the political winds will change and the state will ease back. But what we are seeing now may be different, and it seems unlikely that the state will be interested in relinquishing its newly acquired positions in the mining business any time soon.