The government of Indonesia in January banned the export of all raw materials and then introduced an escalating export tax of 20% to 25% on copper concentrate sent out of the country. The tax would increase to 60% by 2016. The clear intent is to force copper miners to process raw materials and build smelters in Indonesia to move the country up the value chain.

The country’s two largest copper miners, Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) and Newmont Mining Corp. (NYSE: NEM) have refused to pay the new tax claiming that it violates their existing contracts. The government backed off a bit last week, saying that it would “consider reducing the duty for miners who are ‘serious’ about smelting their mineral concentrates in the country before shipping the metals to buyers abroad,” according to report in The Wall Street Journal.

Freeport said last week it may declare force majeure if it cannot resolve the dispute, but it has also told the government that it is “serious” about building a smelter in Indonesia. The company has not exported any copper concentrate since mid-January.

The export ban and tax may be a blessing in disguise. Over the past year, copper prices have fallen from more than $3.70 a pound to around $3.20 on the Comex. In China, prices in Shanghai are around $4 a ton, largely because the yuan is weakening so fast. The falling yuan is generally interpreted as indicating that the Chinese economy is slowing down. The government is rumored to be considering a wider trading band for the currency, which will boost volatility even as the economy slows..

Additionally, there is still plenty of evidence that Chinese copper financing deals, where copper is used as collateral to obtain long-term loans, has been artificially driving up apparent demand for copper. As long as China is able to trap a good portion of the world’s supply of copper to use as collateral on long-term debt, copper prices will be propped up — until they’re not. When the day of reckoning will occur is still anyone’s guess.

And as for Freeport and Newmont? The companies are too important to Indonesia’s economy for the government to drive them to shut down. Freeport is, in fact, Indonesia’s largest taxpayer. Last week the government blinked and given the state of the copper market, Freeport and Newmont can probably hold out longer than the government.

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