T

he global financial crisis is apparently also having an impact on the mining sector. People are thinking twice about investing in the mining sector, especially in companies that carry a high risk, such as those in the exploration business.

Stock prices in numerous countries, including in Indonesia, have declined. From the percentage point of view, the decline in the combined stock price index at the Indonesian Stock Exchange has been rather drastic. The financial crisis has also affected the energy and mineral resources sector.

As investors are reluctant to invest in exploration companies, the effects will be felt in three years when there are no new discovery or mining reserves. What then is the future of the mining sector in Indonesia after the worldwide economic downturn?

"The future of mining in Indonesia is still bright as no company here has experienced any losses due to the global financial crisis. This is quite a relief," said the vice chairman for energy and mineral resources of the Indonesian Chamber of Commerce and Industry (Kadin), Herman Afif Kusuma, in Jakarta on April 14.

According to Herman, it would be wrong to say that a number of mining companies have experienced losses due to the crisis when in fact they have simply made less profit. "Indeed, there is a reduction in profit during booming times, but there aren't any mining companies that have experienced losses due to the crisis," said Herman.

The chairman of the Indonesian Mining Community (MPI) said that there was no reason for mining companies here to lay off employees, even less so if they use the global financial crisis as a reason. "We must be on guard against such things," he stressed.

He acknowledged, however, that the mineral sector had received a hard blow, while the energy sector was experiencing no problems because selling prices were relatively normal.

The hardest hit companies are the major foreign investors, such as PT Freeport and PT Inco, but they have not experienced any losses.

Herman explained that mining companies that purchased concessions two or three years ago were experiencing problems amid the crisis as prices for mining products had significantly dropped.

He also admitted, however, that the global crisis had made most investors adverse to investing in the mining sector, so that infrastructure development had been shelved.

He also mentioned that the lack of legal certainty had a negative impact on investments in the mining sector. He explained that the Mineral and Coal Law leaves a number of questions unanswered for foreign investors, including the change in contract mechanism from government-to-business to business-to-business, meaning contracts will not be awarded by the government but by a business entity formed by the government. There is also a question regarding the continuation of contracts that were awarded to investors before the new Mineral and Coal Law comes into effect.

However, Herman was optimistic that after the Mineral and Coal Law comes into effect it would attract foreign investment in the domestic mining sector.

So far, at least three foreign investors have expressed interest in investing, namely Rio Tinto, BHP and a Russian company. The Mineral and Coal Law, which replaces Law No. 11/1967, can accommodate the interests of many parties and defines the authority of the central government and regional administrations.

Meanwhile, Indonesian Coal Mining Association (APBI) chairman Jeffrey Mulyon recently said that the global financial crisis was having an impact on the domestic mining sector and all parties needed to formulate the best solution so that domestic mining companies do not collapse.

Anticipation is important as the mining sector makes a huge contribution to the Indonesian economy by employing millions of people. Data as per September 2008 shows that the mining sector contributed 11.54 percent to the nation's Gross Domestic Product (GDP) amounting to Rp 142.1 trillion. If many mining companies go bankrupt, then the government would have another heavy burden as unemployment would increase.

He said that the crisis should not be taken too lightly or be regarded simply as a business matter. The decline of coal, oil and gas prices are not due to faults within the industry, and therefore mining companies should be saved for the benefit of regional economies.

Previously, Indonesian Statistics Agency (BPS) chairman Rusman Heriawan said that in the first quarter of 2009, there would be a decline in processing, mining and exploration activities. However, other sectors face brighter prospects, such as farming, finance, rental business and service companies.

In the meantime, PricewaterhouseCoopers Indonesia (PwC) reported that although the mining industry here recorded good financial results in 2007, new exploration projects were few.

"Indonesia has less geological attractiveness," said technical advisor of PwC for the mining sector Sacha Winzenried recently.

However, Winzenried stated that this sector had made a large contribution to state revenue. In 2007, the sharp increases in mining commodity prices generated huge profits.