A proposed $2.5 billion Chinese investment in an Indonesian copper smelter has fallen apart on terms. Photo: Representational Image/iStock

JAKARTA – Talks between Freeport McMoran Copper & Gold (FCX) and China’s Tsingshan Steel over the construction of a US$2.5 billion copper smelter on the eastern Indonesian island of Halmahera have collapsed, dealing a blow to Chief Maritime Minister Luhut Panjaitan who had pushed the value-adding plan.

The breakdown in the talks had long been rumored after the two companies failed to reach an agreement by a March 31 deadline, but it is only now that the government has acknowledged the project will return to its original site at a Gresik, East Java, industrial site.

It also comes as global copper prices, now around US$10,000 per ton on the London Metal Exchange, approach a record high.

“No go,” director-general for minerals and coal Ridwan Djamaluddin confirmed last week, quoting from a conversation with Tony Wenas, president director of state-owned subsidiary PT Freeport Indonesia (PTFI). “It’s just that it’s not better than the plan to build at Gresik.”

Djamaluddin told Asia Times the major obstacle was Tsingshan’s demand for a 5% discount on copper concentrate from Freeport’s Grasberg mine in Papua’s Central Highlands, which the Arizona-based parent company apparently rejected out of hand.

Analysts say although it did not take an active part in the several rounds of virtual talks, the government presumably agreed with Freeport’s position that the pricing issue was a deal-breaker.

PTFI is part of Mining Industry Indonesia (MIND ID), a state-owned holding company formed four years ago which also incorporates PT Indonesia Asahan Aluminium, diversified PT Aneka Tambang, coal-miner PT Bukit Asa and tin miner PT Timah. 

Copper prices are surging as US and Chinese government’s crank up infrastructure spending. Photo: iStock

MIND ID has made no comment one way or the other on the Halmahera proposal, as might have been expected. But in surprise remarks to Parliament’s mining commission in mid-March, the company’s chief executive, Orias Moedak, said that building the smelter in Papua itself was still an option.

Then in mid-April, Investment Coordinating Board chairman Bahlil Lahadalia added to the distraction by claiming that PTFI, MIND ID and China’s ENFI Engineering were working on a planned smelter project in the coastal district of Fakfak, close to BP’s Tangguh liquified natural gas (LNG) plant in West Papua.

That appeared to be news to Freeport and industry sources say the company is unaware of any detailed studies to determine the viability of the project, given the lack of existing infrastructure, particularly an all-important power supply.  

Driven by the growing electric car market, investors are forecasting a sharp increase in copper prices with Goldman Sachs even projecting a historically high price of $15,000 a ton in 2025, compared with the current $10,000. Copper hit a record high $10,147.50 per ton on the London Metal Exchange on February 14, 2011.

In its first quarter earnings report, Freeport took delight in pointing out that electric vehicles use up to four times more copper than an internal combustion engine and that renewable energy technologies use four to five times more of the metal than fossil fuel power generation. 

Issued on April 22, Freeport’s earnings report referred only to an “alternative new smelter” without mentioning Tsingshan by name. It said commercial discussions had failed to reach a “mutually acceptable agreement” and that the company was proceeding with the greenfield project at Gresik.

Indonesian President Joko Widodo and presidential advisor Luhut Panjaitan in a file photo. Image: Agencies

Panjaitan, a key presidential advisor whose portfolio responsibility includes mines and energy, came up with the Halmahera plan last year, saying it would provide synergy with Tsiangshan Steel’s Weda Bay nickel processing complex, which will produce lithium batteries for Indonesia’s fledgling electric car industry.

But Economic Coordinating Minister Airlangga Hartarto, Mines and Energy Minister Arifin Tasrif and other senior officials appear to have been less enthusiastic about the idea, despite some making public statements to the contrary.

Last March, Airlangga openly expressed his preference for the original site after meeting with Gresik district chief Fandi Ahmad Yani, who pointed to the benefits of Gresik’s Java Integrated Industrial and Port Estate (JIIPE) as a newly declared special economic zone (SEZ) and home to the planned new smelter.

The youthful Yani belongs to the National Awakening Party (PKB), widely recognized as the political arm of the mass Muslim organization Nahdlatul Ulama, which played a major role in President Joko Widodo winning re-election in 2019.   

Boosted by tax cuts and other incentives that go with SEZ status, JIIPE is expected to contribute exports of $10 billion a year once it is fully operational, as well as providing valuable import substitution for metal and chemical industrial products.

For Panjaitan, Halmahera made sense because the sulphuric acid derived from copper smelting is needed to produce nickel sulfide, the composition of the alloy used in Tsingshan’s planned lithium battery plant, part of an integrated $10 billion complex that also includes a nickel smelter and stainless steel facility.

The minister said Tsingshan had agreed to pay 85% of the cost of the copper smelter, with Freeport and the government committed to sharing the balance. But in the end, the Chinese appear to have shied away from such a marginally profitable business.

Trucks are parked at the open-pit mine of PT Freeport’s Grasberg copper and gold mine complex near Timika, in the eastern region of Papua. Photo: Antara Foto

Freeport has dragged its feet on building a new smelter from the start and now puts the blame on the Covid-19 pandemic as the reason it has spent only $159 million of the $2.8 billion needed to complete the Gresik project, which has been delayed to 2024.

Even then, with the government having to pay half the price of the new undertaking, along with a share in the cost of developing the Grasberg’s new underground mine, officials and politicians alike may be more inclined to consider the proposed $200 million expansion of the nearby Mitsubishi-run facility from one million to 1.3 million tonnes a year.

PT Smelting has been processing 40% of the Grasberg’s output since it was commissioned in 1996, but since the implementation of the 2009 Mining Law in 2014 the government must give its approval to Freeport exporting its remaining one million tons of copper concentrate to markets in Japan and Spain.

An extension still means that exports would continue at a slightly reduced rate, with Freeport paying export duties of 5% on the value of the concentrate, reduced from 7.5% in 2015 as a reward for the stuttering progress it had made on pre-engineering and feasibility studies on the new smelter.

But as is now the case with China’s dominant position in the nickel processing industry, a new smelter designed to process two million tons of concentrate, would meet one of the main political objectives of the Mining Law in adding full value to Indonesia’s vast mineral resources.

Anxious to cash in on soaring copper prices, Freeport expects its underground operation to be in full production by the middle of next year, churning through 220-230,000 tons of ore a day. That will be similar to the output from the vast open pit, which was closed in late 2019 after 30 years in operation.