T

he fallout from a sustained decline in commodity prices and the government'€™s recent ban on raw mineral ore exports have caused non-performing loans (NPLs) in the mining sector to jump almost twofold in the first half of the year.

Loans that became hard for banks to collect in the mining sector rose to Rp 2.9 trillion (US$247.57 million) during the first six months of 2014 from Rp 1.08 trillion in the same period of last year, according to banking statistics published recently by Bank Indonesia (BI) and the Financial Services Authority (OJK).

The latest growth rate of NPLs was much higher than during the same period last year, when it rose by only 29.3 percent.

According to the statistics, joint-venture banks recorded the highest surge in NPLs of 586.6 percent, up almost seven times, followed by foreign-exchange commercial banks with 181.2 percent and state-owned banks with 92.6 percent.

Doddy Ariefianto, an economist at the Deposit Insurance Corporation (LPS), attributed the ballooning bad loans on the existing pressure on commodity prices amid soaring expenses.

'€œThe outlook for the mining sector remains bleak because of the low international prices,'€ he said on Monday.

Thermal coal prices at Australia'€™s Newcastle port, for example, have continued to decline, standing at $73.66 per metric ton in July 2014 '€” the lowest since September 2009.

The Newcastle Index is used as a price benchmark for Indonesia, Asia'€™s biggest exporter of thermal coal for power plants.

According to the report, total outstanding loans for the mining sector stood at Rp 116.63 trillion in the first half, climbing 7 percent on a yearly basis. Lending grew by 17.3 percent in the same period of last year.

The Boston Consulting Group (BCG) highlighted the declining prices and soaring expenses in the mining sector in its latest report, Value Creation in Mining 2013: The Productivity Imperative.

It noted that commodity prices had fallen on average by 5 percent annually between 2009 and 2012.

Marc Schmidt of the Singapore-based BCG said rising costs were one of the reasons behind the drop in the financial performance of Indonesia'€™s mining companies.

Almost all Jakarta-listed miners are suffering from financial woes as a result of the business slowdown.

Coal miner PT Berau Coal Energy, for example, reported a net loss of $10.18 million in the first quarter of this year, which led to worries over its ability to pay its debts.

Berau now has $500 million guaranteed senior secured notes due to mature in 2017 and $450 million in bonds, issued by its subsidiary, Berau Capital Resources II Pte. Ltd.

Bank Mandiri chief economist Destry Damayanti said the escalating NPLs in the mining sector were expected, particularly after the ban on raw mineral ore exports was introduced in January.

Under the policy, miners are required to process their commodities in domestic smelters before exporting. While coal is exempted from the policy, the ban has particularly impacted producers of nickle, bauxite and copper.

Destry warned that the steep rise in NPLs was alarming, and suggested that banks needed to be very cautious when disbursing loans to the sector.

'€œHowever, the amount of loan funds channeled to miners is still relatively low, at around 3.4 percent of the overall outstanding loans already disbursed by banks,'€ she said.

Indonesian Mining Association vice chairman Tony Wenas projected that the mining sector would continue to suffer from the low prices and export ban in the coming months. '€œA policy to cap coal output may help improve coal prices, but the situation will still largely depend on global demand.'€