Indonesia mining royalties increase threatens output and profits

Miners in Indonesia warn of lower production and job cuts after Jakarta raises royalties on key commodities.

A coal mining truck drives along a haul road at an open-pit coal mine in Kalimantan, Indonesia, on December 8, 2024. Photo by Afriadi Hikmal/Nur

By Anna Fadiah and Hayu Andini

Indonesia’s mining industry is bracing for a wave of production cuts and shrinking profits following the government’s decision to implement a significant mining royalties increase. The move, impacting major players like Vale and Freeport-McMoRan, raises concerns about the stability of one of the country’s most critical economic sectors.

The Indonesia mining royalties increase, announced over the weekend, targets a broad range of key minerals including nickel, coal, copper, and gold. Jakarta’s decision comes amid its struggle to raise revenues to finance ambitious new social programs while grappling with growing fiscal pressures.

Nickel, a cornerstone of Indonesia’s mining exports, faces one of the steepest hikes. Under the new structure, nickel royalties will rise from a flat 10 percent rate to a flexible range between 14 and 19 percent, depending on the prevailing market price. As the world’s largest producer of nickel—a crucial element for stainless steel production and electric vehicle battery manufacturing—Indonesia’s move is likely to have broad global repercussions.

"This is an additional burden, especially because the regulation has been issued during a commodity price downturn," said Hendra Sinadia, executive director of the Indonesian Mining Association. Speaking about the Indonesia mining royalties increase, Hendra warned that operational costs would surge while profits would dwindle, forcing some companies to cut production or even shut down mines altogether.

Indonesia’s mining sector under pressure

Commodities, especially nickel, coal, and gold, remain vital pillars of Indonesia’s economy. The nickel sector, in particular, has seen explosive growth over the past decade, fueled by surging foreign direct investment and robust demand from the electric vehicle industry. However, this latest Jakarta mining tax increase comes at a time when nickel producers are already battling falling global prices and escalating regulatory costs.

New rules, such as the rise in value-added tax and mandates to use more biodiesel fuel, have pushed operational expenses higher this year. In March, another blow landed when Indonesia ordered all exporters of natural resources to retain a larger share of their foreign earnings onshore for at least one year. The measure, intended to bolster foreign currency reserves and support the rupiah, which is hovering near historical lows, has further strained corporate balance sheets.

Given these headwinds, the Indonesia mining royalties increase has been met with intense resistance from industry groups. "It’s possible that some companies may have to reduce their production, or even shut down the mines," Hendra warned.

Government defends higher royalty rates

Despite the backlash, Jakarta has defended its decision to raise mining royalties. Officials argue that higher levies are necessary to ensure that Indonesia’s natural wealth benefits the broader population, particularly as the country seeks to implement expensive social programs.

President Prabowo Subianto’s administration recently unveiled a $28 billion plan to provide free meals for schoolchildren and pregnant women. To fund this flagship initiative, the government has embarked on a $19 billion austerity campaign to reallocate spending and is under increasing pressure to boost revenues from existing industries like mining.

The urgency is compounded by a worrying dip in state revenues recorded in the first two months of the year, which triggered a sell-off in Indonesia’s stock market and intensified downward pressure on the rupiah.

"The state budget is suffering… unfortunately, we are the only hope for the government," Hendra said, highlighting the commodity sector’s pivotal role in Indonesia’s fiscal stability amid the Indonesia mining royalty hike.

Fallout for the nickel industry

Nickel producers have been particularly vocal in their opposition to the royalty changes. The Indonesian Nickel Miners Association described the timing of the increase as "ill-timed," citing ongoing low prices and the mounting global economic tensions arising from the U.S.-China trade war.

"The increase in royalties has the potential to reduce investment interest in the upstream and downstream nickel sector, weaken the competitiveness of Indonesian nickel products in the global market, and lead to mass lay-offs due to margin pressures," the association said in a statement.

According to industry insiders, smaller miners who lack integrated smelting and processing operations are likely to bear the brunt of the Indonesia mining royalties increase. A senior executive from the nickel sector, who requested anonymity, warned that non-integrated miners would likely attempt to pass on the additional costs to smelters. This cost inflation would ripple throughout the entire supply chain, ultimately eroding the competitiveness of Indonesian nickel on the world stage.

Broader risks to Indonesia’s mining economy

Beyond nickel, the increased royalties also affect Indonesia’s significant coal, copper, and gold industries. These sectors are critical not only for export revenues but also for domestic employment and regional development.

Analysts warn that Jakarta’s strategy could backfire if companies reduce output or shift investments elsewhere. Lower mining activity would mean reduced government revenues in the long term—a potential irony given that the royalty hikes were intended to close the fiscal gap.

Moreover, weakening investor confidence in the mining sector could deter new projects and expansion plans, precisely at a time when Indonesia is attempting to position itself as a critical node in global supply chains for electric vehicles, renewable energy, and strategic minerals.

A delicate balancing act

Jakarta now faces a delicate balancing act: securing immediate fiscal gains without crippling the sectors that underpin its economic future. While the goal of ensuring that natural resources better serve the Indonesian people is laudable, industry observers argue that heavy-handed approaches like sudden royalty hikes could undermine long-term growth.

As the Indonesia mining royalties increase takes effect, both miners and government officials will closely watch the fallout. Production cuts, layoffs, and investment slowdowns could ultimately force a reevaluation of the policy. For now, however, miners warn that the increased burden could mark the start of a difficult chapter for Indonesia’s resource-dependent economy.