Upgrade or get out, Indonesia tells miners

　　Indonesia is prepared to suffer a drop in mining exports as it seeks to force firms to invest in processing ores into refined metals, part of the government's long-term strategy to upgrade Southeast Asia's largest economy, its trade minister said.

　　New rules slapping an export tax on ore shipments and requiring miners to submit plans for smelters led to a slump in June mine exports, as firms halted operations and laid off hundreds of thousands of workers. So be it, says Gita Wirjawan.

　　"I don't want my kids to just be coal exporters. I want them to be able to make something," Wirjawan, the father of three school-age children, told Reuters in an interview on Thursday. "My trade policies are geared towards being able to climb up the value chain."

　　Indonesia is the world's top exporter of coal for power stations and of nickel and tin, as well as a major supplier of bauxite, iron ore, gold and silver. Most metal is exported as ore to be refined in countries such as China, Japan and United States. About 70 percent of its total exports are commodities.

　　Now, Indonesia wants to change that by refining the ore domestically and then either shipping finished metals overseas for much higher prices or to profit further by manufacturing them at home into steel or iPads - just as its Asian peers do.

　　"Everyone around you in ASEAN, everyone around you in Asia-Pacific, knows how to make Blackberries, handphones, plasma TVs. We can't even make stuff like that," said Wirjawan, adding that the nation's tech graduates could do it with capital and the right policies.

　　ORE EXPORTS SLUMP

　　For now, the May rules forcing miners to prepare for a total ban on raw ore exports from 2014 has spawned industry chaos. June exports of nickel ore slumped 80 percent and copper ore exports slid 90 percent, Trade Ministry data shows.

　　"It's not like we're happy taking a hit on exports of metals and minerals... if this were to further encourage more investment in the downstream, it would be good for the future of Indonesia," Wirjawan said.

　　Mining associations say activity has been halted as firms are facing a bureaucratic backlog to get their refining plans approved for an export recommendation from the Ministry of Energy and Mineral Resources, and they then need an export license from the Trade Ministry.

　　Wirjawan admitted there was a licensing backlog and has created a centre in his ministry to handle it, though it was empty when Reuters visited.

　　Previously, mining licenses were given out by local mayors, a process prone to corruption, miners and graft experts say. Now industry insiders say the state is trying to direct that revenue to Jakarta at a time when the country's major political parties are seeking to raise funds for a wide-open presidential election in 2014 that will determine the direction of the world's fourth most populous nation.

　　Wirjawan said to let him know if any corruption was found.

　　NO LONGER A GOLDEN BOY

　　Even once the license backlog is cleared, miners say it will be impossible for Indonesia to build enough smelters within two years to process all its ore, and in any case, there is sufficient global smelting capacity. But the government would rather halt mining than run down its ore reserves this decade.

　　"We sent out a message very clearly at the end of 2009 with the mining law... And now you call me a protectionist? There's a lot of hypocrisy out there," said Wirjawan, referring to the law the new rules are based on and responding to widespread criticism that his policies have been nationalistic.

　　Wirjawan, a former JPMorgan banker with a master's degree from Harvard, won plaudits from the foreign community during his previous tenure as chief of the country's investment board. He successfully promoted Indonesia and oversaw a sharp rise in investment.

　　He was rewarded with a promotion to the cabinet and swapped suits for a bureaucratic uniform late last year. An accomplished musician, Wirjawan moved to reinvigorate the Trade Ministry, occasionally playing a new piano in the lobby and spiffing up the building with fresh flowers.

　　But the trade and mining policies have led many foreigners to see him as a compromised symbol of the young democracy's stifled reform process.

　　"Headline: No longer a golden boy," remarked Wirjawan, drawing an imaginary news headline in the air.

　　STILL ATTRACTING INVESTORS

　　Despite the foreign disappointment, given President Susilo Bambang Yudhoyono is in his final term and has no obvious successor, some analysts see the 46-year-old Wirjawan as a possible candidate for president in 2014.

　　Wirjawan refused to be drawn on his future ambitions. But he said he and the government were taking a long-term view.

　　"We've got the next 20 to 30 years... We've got 250 million people and we're gonna stay young for a long time. More so than ever, the smart investors pay a little bit more premium on demographics," he said, referring to the economy as "damn sexy".

　　The new trade and mining rules certainly do not seem to have hampered foreign investment so far, and in fact may be driving it with a slew of projects submitted on paper to build smelters. In the second quarter, foreign direct investment was up 30 percent from a year earlier, led by mining.

　　Nevertheless, many small-scale miners, both local and foreign, in far-flung islands in the archipelago such as Sulawesi, have given up because they do not want to build multi-million dollar smelters and as the new 20 percent tax on raw ore exports is killing their margins, executives say.

　　"Perhaps they are not the kind of miners we want in Indonesia," Wirjawan said. "We want people who are willing to take the long-term view."