PT Freeport Indonesia, a subsidiary of US-based Freeport McMoRan Copper and Gold Inc., says it may have to shut down most operations at its Grasberg mine in Papua if the ban on raw ore exports set to take effect in January goes through as planned.

Freeport Indonesia president director Rozik Soetjipto said on Thursday that the company would have to cut its production by 60 percent, since the existing smelting plant it used would not be able to process the company’s entire ore output. 

He also said that the copper and gold mining giant would have to lay off more than half of the company’s employees, or around 16,000 workers. “If forced, we are ready with production adjustment. However, we don’t know how long that can last. 

The overhead cost will be huge, and layoffs will happen,” Rozik said over the phone on Thursday.

Currently, Freeport Indonesia delivers 40 percent of its annual production of around 2.5 million tons of copper concentrates to a local smelter belonging to PT Smelting in Gresik, East Java. The company has a 25 percent stake in Smelting, which produces 300,000 tons of copper cathode per year.

Rozik said that the 60 percent cut in production would cause a 65 percent drop in its sales, a loss of about US$5 billion a year. The fall in revenue would result in the government missing out on roughly $1.6 billion from taxes, royalties and dividends. 

Rozik said that Freeport was petitioning the government to allow it to continue to export its copper concentrates, which the company said had been half-processed to add value. 

He said that allowing Freeport to export its copper would not breach the law. “We are trying to convince the government that the impact of this will be tremendous, for the company, government and society,” he said. 

Industry players are waiting to see whether the government will fully implement the 2009 Mining Law, which requires mining companies to process their ores domestically before export. The law, which is to go into force Jan. 12 next year, will consequently prohibit the export of unprocessed ore.

The government failed to persuade lawmakers last week to allow an exemption for miners that had shown a commitment to building smelters. The government is still looking for a way to sidestep the law, possibly by adjusting the minimum purity level for processed ores. 

Mining companies have known since 2009 that they would have to build smelters to comply with the law, but so far few have. 

Indonesia is a major supplier of several minerals needed for industries around the world. Consequently, any ban in ore export will tighten the world’s supply and drive up prices, which have been falling due to the weakened global economy.

In anticipation of the ban, large Japanese nickel producers are seeking to increase ore purchases from the Philippines and New Caledonia, Bloomberg reported on Thursday. Sumitomo Metal Mining Co. will secure 40 percent of its imports from the Philippines and 60 percent from New Caledonia. Pacific Metals Co. and Nippon Yakin Kogyo Co. will make similar moves.

“No doubt it’s going to be chaos in January if Indonesia stops ore shipments. Because of the concern, we’ve halted imports from Indonesia from this month through next March,” Nippon Yakin spokesman Yusuke Takahashi said.

Indonesia supplied 44 percent of Japan’s nickel ore imports of 4.7 million metric tons last year, trade data quoted by Bloomberg shows. Indonesia also provided more than half of China’s nickel ore imports of 65 million tons in 2012, along with 47 percent of the Philippines’.

Three-month futures on the London Metal Exchange rose 0.9 percent to $14,150 a ton at 2:03 p.m. in Tokyo after touching a one-month high of $14,180 yesterday. Prices may average $14,750 a ton in the first quarter and $15,250 in the final, Barclays Plc estimates.