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Revealing the unpopular truth of mining: Intertemporal optimization
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Excavators owned by PT Petrosea are shown in this undated photo. The company is a subsidiary of publicly listed coal giant PT Indika Energy. (Courtesy of Indika)
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n 2022, Indonesia succeeded in increasing its production of strategic mineral and energy commodities, such as coal and nickel. The increased production has been a windfall for Indonesia, as 2022 has been a year of commodity price surges. However, the "business as usual" approach to mineral and energy mining often overlooks the concept of intertemporal optimization, which is of utmost importance for the sustainability of the mining industry itself.
The mineral and energy mining industry involves the extraction and depletion of non-renewable resources that have a limited supply. As a result, the operational decisions made by mining companies to exploit these resources today incorporate intergenerational costs that can have significant economic, environmental and social consequences that extend far into future generations.
For instance, as reserves naturally deplete, the prices of finite commodities could surge in the future. Therefore, failing to maintain sustainable exploitation rates in the current generation will prevent future generations from benefiting from the possibility of exploiting finite commodities amid skyrocketing prices in the future.
However, ensuring intertemporal optimization is challenging as it involves making decisions that maximize the long-term economic value of resources over their entire life cycle, spanning several decades.
The key challenge in intertemporal optimization is that the value of a resource can change over time. The decision to extract a mineral or energy resource today may be economically viable due to current market conditions but may not be optimal in the future as commodity prices, operational costs and other factors change.
The complexity of intertemporal optimization in mineral and energy mining increases as several factors, such as ore grade, mineral deposit size, operational costs and commodity prices, must be balanced intergenerationally. Despite this complexity, every decision-making process must involve these factors to optimize the value of resources over time for intergenerational purposes rather than focusing solely on short-term gains.
Going deeper into the case of Indonesia, the Indonesian energy and mineral mining industry has seen significant growth over the years, with the production target of strategic commodities like coal and nickel continuously increasing regardless of the volatility of the price.
