February 4, 2014 / 10:51 AM / in 4 years

Indonesian govt must offer incentives to build smelters-PT Indosmelt

* Indosmelt says smelter margins are very small, calls for govt help

* Says its copper smelter due to start construction next month

* Indosmelt has conditional purchase agreements with Freeport, Newmont

By Michael Taylor and Wilda Asmarini

JAKARTA, Feb 4 (Reuters) - Indonesia’s government must provide tax holidays and other financial incentives to convince companies to invest hundreds of millions of dollars to build copper smelters amid weak global prices, said the head of smelting firm PT Indosmelt.

President Susilo Bambang Yudhoyono last month imposed new mining policies, including a controversial mineral ore export ban and progressive export taxes, aimed at forcing miners to build smelters and process their raw materials in Indonesia.

The policies have forced U.S. miners Freeport-McMoRan Copper & Gold and Newmont Mining Corp, which together produce 97 percent of Indonesia’s copper, to halt all exports. The two firms have yet to commit to building smelters, saying it was not economically viable to make such large investments.

“The margins for smelters are small, very small,” Natsir Mansyur, president director of privately owned and unlisted PT Indosmelt told Reuters. “There must be incentives from the government. To build (a smelter), this business should be protected by the government.”

In mid-2012, government officials said they planned to offer financial incentives to help firms build smelters to comply with the new mining regulations, although the details have yet to be announced and talks are still ongoing.

Indosmelt is planning to start next month construction of a 700,000-tonnes capacity copper smelter, with production due to start in 2017 or 2018. Mansyur did not say whether PT Indosmelt was receiving any government incentives.

A consortium of local and foreign banks would finance 70 percent of the $1.5 billion needed for PT Indosmelt’s South Sulawesi copper smelter, said Mansyur, who is also an official at the influential Indonesia Chamber of Commerce and Industry.

Copper smelters process copper concentrates to make blister or anode, which is then refined into cathode. Besides PT Indosmelt, other firms due to start construction of copper smelters include PT Nusantara Smelting and PT Global Investindo.

Southeast Asia’s largest economy currently has only one copper smelter, PT Smelting in Gresik, East Java, and receives its concentrate supplies from both Freeport and Newmont.

Indosmelt has reached “conditional sale and purchase agreements” to also receive copper concentrate supplies from the U.S.-based miners, the miners’ representatives said.

To make a copper smelter economically viable in Indonesia, benchmark copper prices must trade above $6,000 a tonne, said Mansyur. “With current LME copper price at about $6,000-$7,000, we can get a profit,” he said. “At least a minimum price of $6,200 to break even.”

Goldman Sachs last month forecast global copper prices would rebound from a four-year slump by 2016 and average around $7,500 a tonne in 2017, a year before Indosmelt’s project begins operation. The three-month copper price on the London Metal Exchange traded at around $7,030 a tonne on Tuesday. (Additional reporting by Yuka Obayashi in TOKYO and Yayat Supriatna in JAKARTA; Editing by Randy Fabi and Muralikumar Anantharaman)

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