“It was the best of times, it was the worst of times…” Charles Dickens,A Tale of Two Cities
These words from Charles Dickens’ classic story aptly describe the feelings that many in the mining industry may be experiencing. 2007 saw the commodities boom continue, with sustained demand from the emerging economies driving mineral prices ever higher. Investor confidence in the mining sector was strong in Indonesia, and around the world, as witnessed by a year of significant growth in the market capitalisation of mining companies on both international bourses and the Indonesian exchange. This confidence came to an abrupt end in 2008 with the onset of the global economic downturn. From mid-2008 commodity prices began to weaken, falling off dramatically in the third quarter when the full extent of the economic difficulties being faced by the United States became evident. This saw a massive sell-off of equities around the globe, across all sectors. The mining sector was particularly hard hit given its dependence on commodity prices – the market capitalisation of mining companies listed on the Indonesia Stock Exchange fell by 74% from 31 December 2007 to 30 November 2008.
Coming hot on the heels of these economic difficulties, was the passing of the new Law on Mineral and Coal Mining by the Indonesian Parliament on 16 December 2008, which received the assent of the President on 12 January 2009, becoming Law No. 4/2009. This Law, which had been under deliberation for more than three years, is the biggest change in the mining regulatory framework in more than 40 years. The jury is still out on whether the Law will provide the necessary impetus for increased investment in the Indonesian mining sector, particularly in these tough economic times, and given some uncertainty around its provisions for the transition of existing Contracts of Work, and other new requirements. The industry eagerly awaits the implementing regulations which will accompany the Law, hoping that these will provide the certainty necessary to encourage investment in the large-scale projects which are so vital to a strong mining sector.
Surge in commodity prices continues to drive profitability in 2007, but falls off in 2008
For the Indonesian companies analysed in this survey, revenue increased by 27% in 2007 over 2006 and net profits increased by a massive 65%. This is even more significant considering that 2006 net profits were already 17% above the prior year. 2008 is a stark contrast, with the results for listed mining companies showing a decrease in revenues from 2007 of 3% and a much greater decrease in profitability of 33%, as costs have fallen at a lower rate than commodity prices. This reversal of fortunes was particularly dramatic for the minerals companies with a fall off in prices across the board, but most notably for nickel and copper. The coal miners however managed to show profit growth in both 2007 and 2008, given their annually negotiated sales prices were agreed in late 2007 and early 2008 in the high price environment.
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