Travels in the SE Asian Tinbelt (2) – Indonesia
- By: John P Sykes
Posted in: Blog, Field Visits, Mining, Travel
The final stop on our tour of the SE Asian Tinbelt, which started in Malaysia and Thailand, is the current source of nearly one-third of the world’s mined tin – Indonesia. Stopping briefly in Jakarta to attend the spectacle of an Indonesian wedding and narrowly missing out on a visit from Indonesia’s most famous former resident, Barack Obama (he was supposed to be staying in our hotel, but cancelled his visit to concentrate on the health care bill), we headed to Bankga Island, the heart of Indonesia’s tin industry.
Indonesia is the second largest tin miner in the world, mining around 87,000 tonnes of tin in 2008, 30% of that year’s global total of 281,000 tonnes. Just like the other countries visited in this tinbelt tour though, the recent story of Indonesia’s tin industry is one of decline.
A little more history
The Billiton connection
Like Malaysia and Thailand, Indonesia has a long history of tin mining, going back to colonial times. Bangka’s neighbouring tin-rich island is Belitung, an Indonesian bahasa adaptation of “Billiton”, named after the Dutch mining company that operated mines in the area from a base in Singapore during the colonial period, when the area was the Dutch East Indies. This is one of the reasons why BHP Billiton still has a large corporate office in Singapore.
Surviving the Malaysian Tin Crisis
Due to its lower cost of mining, Indonesia’s tin mining industry survived the 1980s in a way the Thai and Malaysian industries did not. The decline of tin mining in Malaysia and Thailand coincided with a rise in production from cheaper producers like Indonesia and China throughout the 1990s and early 2000s. Following a liberalisation of the industry in 2003, Indonesia was briefly the world’s largest miner of tin ahead of China.
However, much of this mining was illegal, environmentally and socially damaging, and also not a brilliant tax generator, so over the last few years the Indonesian authorities have clamped down on illegal tin mining (and smelting) causing a vast drop in production, from 137,000 tonnes in 2005 to 87,000 tonnes in 2008. This has not been enough though to stop the damage to the country’s best alluvial deposits and the industry is now battling with the same problems of lower grades and ever-deeper offshore deposits, that the Malaysian, Thai and Brazilian industries were contending with 30 years ago.
Into the present
Trying to understand the supply chain
The complexity of Indonesia’s tin industry easily warrants an article in itself. Like the rest of the tinbelt, there are some onland primary granite deposits. However, the majority of mining occurs in alluvial tin deposits, both onland and offshore, mining tin that has washed out of the primary deposits. In general, both the offshore and onshore mining leases are owned by official mining companies, though both illegal and legal mining occurs on the leases. Illegal mining also occurs on land that is not leased for mining, sometimes including environmentally-sensitive land.
The legally-mined tin goes to the official mining companies’ smelters (both PT Timah and PT Koba are integrated operations), where they produce LME-branded tin ingots for export.
Where possible the official tin mining companies try to stop illegal mining on their leases. If unsuccessful, they will often try to buy the tin off the miners, effectively turning them into high-cost contractors. If they fail at this stage, the illegally-mined tin usually ends up at one of the island’s many independent tin smelters, where it is usually smelted into low-quality tin ingots. These ingots can then be exported to tin smelters in Malaysia or China for upgrading into LME-quality ingots. Indonesia’s official mining companies also have the opportunity to buy “their” tin back at this stage as well, buying the poor quality ingots of the independent smelters to upgrade into LME-brand ingots.
In theory, all illegally-mined tin goes to the independent smelters, which is why they also have become a focus of police clampdowns. The official mining companies do not want to encourage illegal mining by buying illegally-mined tin, and indeed would be breaking the law if they did. However, in practice, the more time the tin ore or concentrate spends out of the official companies supply chain the greater the chance it is mixed with some form of illegally mined tin. This could be as ore, when tin ore from various illegal operations is combined for sale to a ‘collector’, or with illegally produced concentrates for sale to a smelter. Even when buying the poor quality ingots from the smelters there is no real way of telling whether the source concentrates where legally mined or not, or whose lease they came from.
Further complicating the issue, independent smelters themselves have started getting involved in mining, partly in response to a tightening tin raw materials market as the police restrict illegal mining; partly because the businessmen behind the smelters want to enter the higher-margin mining industry. A number of independent smelters have also recently achieved LME-brand status for their ingots, realising there is margin in this, reducing the integrated smelters chances to toll poor quality ingots into LME quality ingots.
Policing the industry
Indonesian politics is complicated. In this fast-growing but vast, disconnected country, local and national consideration are often at odds. The Bangka-Belitung tin miners, smelters and traders are still digesting the implications of the new Mining Code passed at the end of 2009. This includes measures to ensure raw materials are smelted within the country (good for the local economy), illegal mining is restricted (bad for the illegal miners and independent smelters), and mine workers are employed as full time workers, not contracted (good for the mine workers, bad for the owners).
There are other legislative issues that affect mining too, for example environmental laws. Indonesia contains much of the world’s important rainforest and is encouraged internationally to protect it, partly to help mitigate the effects of climate change. There were many complaints from miners about the forestry laws and permits and the implementation of them.
A law is only as good as its implementation, which requires well-directed efforts from both politicians and the police force. Indonesia is notorious for corruption and much police work is in effect only ‘local tax collecting’. All companies have to be aligned with local politicians and men of influence. Indeed, several of the independent smelters have formed a consortium, partly to synergise buying opportunities but also to increase their influence and protect themselves from (or indeed align themselves with) men of influence.
The mechanics of mining
The onland alluvial mining is relatively simple, with a “gravel pump” used to suck up the tin bearing gravels, which are then concentrated using a “palong”. This is a piece of wood with ramps along it, over which the gravel is washed. The heavy tin ore is trapped behind the ramps, whilst the lighter waste material washes over the ramps and into a waste pile. The gravel can be concentrated up to 50-70% tin this way, which is enough to sell to a smelter as a tin concentrate. This type of mining is done by both the legal mining companies and by thousands of illegal miners.
Due to the deficient quality and quantity of policing in Indonesia, the official mining companies find it difficult to stop illegal mining on their licences, but are developing increasingly clever ways of trying to limit it. For example, PT Timah has started digging moats around their licences, stopping illegal miners bringing heavy duty equipment onto the licence, somewhat reducing their capacity. This, combined with a toll gate at the only gap in the moat, where the company buys its tin back off the illegal miners – effectively turning them into mining contractors, is at least mutually beneficial. Quite how such a system will work under Indonesia’s new mining law, where companies will not be allowed to contract out mining is not clear. Such a method also damages the deposit on the licence and makes sustaining a profitable, long-life mine more difficult.
For large alluvial tin deposits still below either a river or lake, it is possible to use a large bucket ladder dredge to mine the alluvial tin. As the name suggests, a series of ‘buckets’ on a rotating conveyor belt scoop up gravels from the river or lake bed. The higher capital costs involved mean this method can only be pursued by the larger legal mining companies. Currently there is only one of these bucket ladder dredges working onshore (operated by PT Koba), though there are still several offshore, operated by state miner, PT Timah. These dredges work in co-operation, with cheaper and more numerous cutter-suction dredges, which scythe the sea bed gravels and sands before sucking them up for processing.
The difficulties of operating offshore do not deter illegal miners though, and PT Timah’s offshore licenses are overrun by illegal miners using “suction boats”. Suction boats are surely a contender for the mining industry’s most unusual, entrepreneurial, cheap and dangerous mining equipment. Essentially a crew of four rigs either an old fishing boat or simply a raft of oil drums and logs, with a small outboard motor, a diesel pump with 10 metres of plastic pipe attached and a small wooden palong. With this equipment the crew can sail out to where the bucket ladder dredges are operating and with the aid of a good diver (the seafaring people of Sulawesi are apparently the best) they can suck up sands and gravels from the sea bed, freshly loosened by the bucket ladder dredges. Despite the enormous danger of this activity there are literally hundreds of these boats following the bucket ladder dredges around.
Despite the difficulties of operating offshore, mining, particularly the illegal kind, has increasingly moved off land. Malaysian Smelting Corporation (MSC) estimates the number of illegal onland miners has fallen from nearly 20,000 in 2005 to fewer than 6,000 currently. At the same time, the number of illegal offshore miners has increased from under 2,000 in 2005 to more than 3,000 currently. Overall this reflects the sharp decrease in illegal mining, but nonetheless shows people are still willing to risk it offshore, partly because like in any developing country policing efforts can be a bit hit and miss, but offshore are practically impossible.
Back to the future
Declining grades, deeper deposits, further away
As well as increased policing of illegal mining, the other factor behind the decline in tin production from Indonesia is economic. As mentioned, many of the best deposits have been already mined (either because they were high grade, shallow or otherwise easy to access) or damaged irrecoverably. Both legal miners and the illegal sort are now having to process more ore to recover the same amount of tin. Those mining onshore are having to dig deeper and move further into the hilly, jungle-covered island interiors, whilst those offshore are having to travel further out into deeper water, and dredge deeper into the seabed. All of this increases operating costs.
National and global economic trends are also not helping the miners. Indonesia is a fast growing and high inflation economy (about 10% annually for the last decade), so costs for everything, including mining components, are rising fast. This also puts pressure on wages in the formal sector, and may encourage illegal miners out of the industry as profit margins diminish (this would probably be good for the country, but it would still be bad for tin production levels).
The relative simplicity of alluvial mining means one of the largest cost components is diesel fuel, now up to 50% of the cost for some operations. This gave Indonesian mining an advantage when it was liberalised at the turn of the century, when oil prices were at record lows following the dot.com collapse and before the ‘Chinese Miracle’ had started. At this time, Indonesia was also still a net exporter of oil and an OPEC member. Diesel in the country was heavily subsidised, even for business, and miners, both legal and illegal, took advantage of this. Since then, demand for oil in Indonesia has outstripped supply significantly, such that the country had to stop subsidising all but some diesel for domestic consumption in 2005. In 2008, the country withdrew from OPEC altogether as it had become a net importer, rather than an exporter. This had a significant effect on costs in the mining sector, illustrated by the long queues at petrol stations on Bangka, where local residents queue to buy subsidised domestic diesel to sell to the illegal miners.
Falling global competitiveness
The greater exposure to oil prices and globally high inflation rates mean that mining costs in Indonesia will rise faster than in many other countries around the world. As such, expect to see Indonesian alluvial mining operations move up the cost curve from their secure 2nd and 3rd quartile positions, to a more marginal 4th quartile position.
Implications for the global tin industry
The implications for the global tin industry of higher costs and falling production from Indonesia are dramatic. The loss of production from Indonesia will need to be compensated for elsewhere around the world. This is the case, even assuming that demand does not increase from its current level, which seems unlikely, considering tin’s importance as solder in the booming consumer electronics sector. Where is this extra supply going to come from?
Conflicted tin in the Congo
Recently, tin production from the D.R. Congo has increased rapidly following the resolution of the country’s civil war in 2003. The area of eastern Congo (bordering Rwanda), where the tin comes from, is however still heavily controlled by militant groups, which were involved in the vicious civil war and genocide in the area. As such the area is coming under increased focus from NGOs and end use electronics and telecoms consumers, who do not want tin to be used to fund these armed groups, as discussed in Part 1 of this travel report. It seems that legislation and political pressure will eventually conspire to limit the flow of tin out of the Congo, adding to supply side woes and driving up prices.
Production stalling in China
The world’s major producer is China, but even here growth seems to have stalled. China is becoming increasingly aware of the environmental problems and poor economic planning associated with small scale mining and is acting to consolidate its mining industries across a range of commodities into bigger, better regulated companies. Whilst this is likely to increase the efficiency and profitably of Chinese tin production, it may slow production growth, despite domestic demand increasing strongly. Chinese tin smelters have already begun following the country’s copper smelters in make mine acquisitions abroad to secure future tin raw materials supply. Yunnan Tin’s partnership with Australia’s Metals X is probably the best example of this.
Alluvial production has probably peaked
If alluvial tin production has probably peaked in Indonesia, it certainly has elsewhere in the SE Asian Tinbelt. It seems unlikely tin mining will return to Thailand, due to its direct conflict with highly profitable tourism. Similarly, the Malaysian industry has probably also peaked, and this is in essence what underlay the tin crisis in the 1980s, when the country tried to support an unprofitable industry. With today’s higher prices there is a small revival in the industry, but it is not likely to return production levels to anything close to that of the 1970s and 1980s.
Further north in the Tinbelt, production will not increase from Myanmar unless the military junta there comes to an end and the economy opens up, allowing the required capital spending to mine the resources there to their fullest economic capacity. Indeed, the longer the junta goes on, the greater the long-term damage to the tin deposits is likely to be. Elsewhere in SE Asia, there is alluvial production in countries such as Laos and this may grow as the countries develop, however, it would appear these countries are not as geologically well endowed as Indonesia, China or Malaysia.
There is the possibility that further alluvial tin discoveries could be made in Indonesia along the northern coast of Java, but there is little exploration there at the moment and it seems any substantial production is a fair way off. Similarly, plans to mine the hard rock, primary deposits are unlikely to reduce the rate of production decline, especially as they are likely to entail much higher operating costs.
There are alluvial tin deposits elsewhere in the world, primarily in Brazil and Nigeria. Leading tin miner Minsur is trying to resurrect the Pitinga operations in Brazil, through a combination of hard rock and alluvial mining of tin and a number of by-products including tantalum, niobium and rare earth metals. This would appear to be a well-funded exception rather than a trend, as much of the country’s best alluvial deposits were depleted in the mid-20th century. In Nigeria, quite how the industry will fare in a country so focused on oil production is unclear.
San Rafael will not last forever
Currently a tenth of the world’s tin production (and amongst its cheapest) comes from Minsur’s San Rafael mine in Peru, however the mine has now been operating for several decades and unless new brownfield exploration increases reserves, there is probably not much more than five years production to come before annual output dramatically tails off.
Back to the future
With tin mine production seemingly in decline in many of the key producing areas, including the SE Asian Tinbelt, China, Central Africa and South America, miners will have to look elsewhere. Parts of North America, Western Europe and Australia have at times all been significant tin producers. Indeed, the UK is thought to have supplied over 95% of the world’s annual tin production before the 19th century.
Deposits in these regions are small, deep, low grade, scattered and with complex mineralogy, all of which will result in higher operating costs, and because most will be hard rock operations, will also require greater capital expenditure than alluvial deposits. This is not mentioning the higher labour costs, fuel and electricity costs and land costs in these countries.
On top of this, there are some interesting regulatory hurdles to be faced in some of the Western European countries such as Germany and the UK, which other than declining coal industries, have not seen significant new mining capacity start-up for around a century! Despite being British nationals and working in the mining sector, we are not exactly sure if the UK has a Mining Code (and if so how old it is), whether royalties are paid (and if so at what level) or even which government department(s) regulate mining.
We will have to pay more for tin
Low cost production is in decline around the world. To secure future supplies of tin, we will have to be prepared to pay a lot more for our tin, to get it from refurbished ‘developed world’ capacity. These ‘developed world’ tin mines will require greater inputs of capital and much higher long term tin prices for them to be deemed economic and the required investment to be made.
Greenfield’s rough calculations suggest long run marginal costs for these type of operations in the US$20,000-30,000 region – considerably higher than today’s tin price and higher than the real price has been in the last two decades. A small number of juniors (mainly in Australia) are starting to see this and may be well positioned to take advantage.
All photos by John Sykes, Greenfields Research, used with permission of PT Timah.