Nickel ore from Indonesia is loaded in remote ports like Obi Island (in yellow), far from the prying eyes of regulators. The trade is profitable, but is coming at an enormous human cost.

On February 17th of this year, the Harita Bauxite sank off Cape Balinao in the South China Sea. Of the twenty-four men aboard, only nine survived. The sea can be a dangerous place, of course, and things happen out there, but the Harita Bauxite’s sinking is troubling beyond the tragic loss of fifteen men. That’s because the loss wasn’t a huge surprise. Indeed, many in the maritime industry all but knew it would happen.

You see, the 192-meter bulk carrier was bound for China from Indonesia with 47,450 metric tons of nickel ore in her holds. That particular maritime activity – shipping nickel ore from Indonesia to China – has quickly become one of the most dangerous jobs in the world and the deadliest activity in modern shipping.

• On October 27th, 2010, the M/V Jian Fu Star sank while carrying nickel ore from Indonesia to China. (13 fatalities)
• Fourteen days later, on November 10th, the M/V Nasco Diamond sank while carrying nickel ore from Indonesia to China. (21 fatalities)
• Twenty-three days after that, on December 3rd, the M/V Hong Wei sank while carrying nickel ore from Indonesia to China. (10 fatalities)
• The next year, things went well until Christmas Day, when the M/V Vinalines Queen went missing. All twenty-three of her crew were thought to have been lost until six days later when the M/V London Courage happened upon Dau Ngoc Hung, a 31-year-old survivor, in a life raft. The Vinalines Queen had sunk while carrying nickel ore from Indonesia to China. (22 fatalities)

In just under fourteen months, sixty-six mariners died in the Indonesia to China nickel ore trade. By January of 2012, that trade – made up only .06% of bulk cargo shipments worldwide – accounted for 80% of the fatalities in bulk shipping.

An unreasonable hazard.

Put another way, if all bulk trade in the world was as hazardous as the nickel ore trade from Indonesia in those 14 months, there would have been over 100,000 fatalities during the same period. When the Harita Bauxite sank, those numbers worsened. There clearly was a problem and it wasn’t that nickel ore couldn’t be safely shipped, but that it wasn’t being safely shipped.

What is happening

In all four sinkings, from October 2010 to December of 2011, it was determined that the vessels had capsized due to liquefaction of their nickel ore cargo. Simply put, the cargo was too wet. When agitated by the motion of the ship, the otherwise sandy ore turned to a flowing mud that sloshed around in the beam-wide holds, causing the giant ships to list and then roll over.

Nickel ore, and other dry-bulk products prone to liquefaction, are moved safely around the world all the time. Shippers simply have to make sure the product is dry enough to ship. “Dry enough” is known as the TML – Transportable Moisture Limit. Making sure nickel ore is dry enough to ship is a simple matter of testing the moisture content prior to loading, and refusing the cargo if it is too wet. This hasn’t been happening consistently in Indonesia.

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That reality caused maritime insurers and the IMO to take note and issue warnings about the hazard. After the Vinalines Queen tragedy, Intercargo – The International Association of Dry Cargo Shipowners – released its Guide for the Safe Loading of Nickel Ore – which warns shippers of the hazard, providing a sort of go/no go chart for the loading of nickel ore that aligned with the IMO’s latest guidance.

The IMO is working on updating the rules again for dry-bulk cargo that may liquefy, but they likely won’t be out until 2015. Even so, rules alone won’t solve the problem. Rules were being broken in late 2010 and new rules were broken and guidelines were ignored in February when the Harita Bauxite loaded her cargo. While regulations may provide more clarity and guidance for lawful bulk carriers, the only paper that can fix the problem in Indonesia is money.

Why it is happening

Nickel pig iron production in China took off in 2006 and so did the demand for nickel ore. The market for nickel ore from Indonesia and the Philippines went from almost zero in 2005 to nearly $5 billion in 2011 according to a report by the International Nickel Study Group. Given the sad state of the bulk cargo market and the sudden realization that dirt was worth money, the region was thrilled with the new demand. Mining operations sprung up and shippers went to work filling the orders. Some of those mines were legal, and others were, well – less than legal. Either way, business was good and money began flowing into places in the world where there wasn’t much before.

Again, this didn’t automatically make the shipping of nickel ore dangerous, but it may have motivated shippers to bend (or break) rules to ensure that the ore kept moving, and orders got filled. For rules to be enforced (like those for moisture limits), someone has to be enforcing them. In Indonesia, an archipelago of over 17,500 islands, the law doesn’t come around too often to ports where much of the ore is loaded. Given the money involved and the remoteness of the loading, it isn’t hard to imagine that looking the other way and hoping had replaced testing and regulation where the ore was concerned.

These cargoes are stored primarily outdoors and just because the IMO code states that loading is prohibited in the rain (or soon after), that doesn’t actually stop anyone from doing it. There are rumors of false test results, forged documents, and just plain old financial pressure to get vessel captains to accept wet cargo. Well-meaning crews under pressure to make delivery may end up relying on less-than-scientific “drop testing” alone to determine how wet suspect cargo may be, a possibly deadly mistake. While they could insist on an independent lab test (as suggested by Intercargo), in all of Indonesia there is only one lab that sufficiently tests for nickel ore moisture levels. One. In a country of 17,500+ islands covering 1.4 million square miles of ocean, one may not be enough.

Click here to view the embedded video.

An unnamed senior maritime insurance analyst told Singapore’s SeaTrade Asia Week last year that, “We have also heard of surveyors being assaulted or arrested by the police and there seems to be little support from the authorities.” That makes sense. If the rules were properly applied, the shipping of nickel ore from many operations in Indonesia would simply shut down for months due to moisture levels during the rainy season.

How it might end

Keenly aware of its new export value (perhaps because of the attention to the maritime tragedies it caused), the Indonesian government promulgated Regulation Number 7 of 2012 on the 6th of February. The rule made it illegal to ship unrefined ore from Indonesia, instead requiring it to be refined and purified first. This had less to do with the danger of shipping the ore and more to do with raising the value of the export, all part of Indonesia’s plans for growth. But the rule was deferred until 2014 and the export of the precious dirt continues.

Some worry that the delay of the rule will make things much worse – in fact, the Harita Bauxite may have been the first casualty of that delay. Now working to beat the new deadline for the unrefined ore trade, shippers and miners alike are moving all they can before the party is shut down, and another rainy season is fast approaching. The new rules won’t begin until after the rain stops, so if we lose yet another bulk ship and more lives this coming year, none of us are allowed to act surprised.

Tangguah LNG, image: BP

(Bloomberg) — Indonesia, the world’s third-largest exporter of liquefied natural gas, will start importing the fuel by 2018 to meet increasing domestic demand, according to the nation’s energy regulator.

Indonesia’s existing LNG-receiving terminal and three planned facilities will get a total of 821 cargoes from domestic gas fields from 2013 to 2025, Rudi Rubiandini, the head of SKK Migas, said in an interview yesterday. That won’t be enough to meet demand, and the plants will have to buy additional supplies from overseas, he said. The nation will continue to export the fuel under long-term supply contracts, he said.

“We can’t keep all supply for domestic use,” Rubiandini said. “We still need some to meet demand from overseas buyers such as Japan that have invested in our energy projects.”

Southeast Asian nations including Indonesia will account for a third of LNG demand growth in Asia by 2025, with the region consuming an additional 45 million metric tons a year, Wood Mackenzie Ltd. said in a report on Feb. 20. LNG is fuel cooled to minus 160 degrees Celsius (minus 256 Fahrenheit), reducing its volume and converting it to a liquid. Qatar and Malaysia were the world’s biggest exporters of the fuel in 2011, according to BP Plc’s Statistical Review of World Energy.

Falling Prices

Indonesia is increasing its reliance on gas as crude output declines. It may supply 52 percent of its production of the cleaner-burning fuel to domestic buyers by 2016, up from 47 percent now, Rubiandini said. The country, which left the Organization of Petroleum Exporting Countries in 2008, won’t return to being a net oil exporter, he said.

The nation plans to produce 7.89 trillion British thermal units a day of gas this year, up about 8 percent from 7.3 trillion in 2012, according to the regulator’s data.

“Importing LNG won’t be a problem for domestic users because prices may fall in the next four years,” Rubiandini said. Prices may drop to $10 to $11 per million Btu from $16 to $17 per million Btu today, he said.

Global liquefied natural gas prices on the spot market will enter a bearish cycle from 2016 to 2017 as new supply comes online, according to a Goldman Sachs Group Inc. report on Feb 19. Liquefaction capacity will increase to 660 billion cubic meters a year in 10 years from current capacity of 400 billion, Samantha Dart, a London-based analyst for the firm, said in the note.

Time to Sell

“It is time to sell LNG for long-term contracts while prices are still good,” Rubiandini said. “We won’t hold exports from future gas projects,” he said.

LNG cargoes to Asia may average $13 per million Btu over the next five to 20 years, while global spot, or short-term shipments, will be $12 per million Btu, Guy Broggi, Total SA’s senior LNG adviser, told a conference in Singapore today.

The nation has 17 oil and gas projects that are scheduled to be producing by 2018, including Masela block at Arafura sea according to data provided by the regulator in December 2012. Masela block is expected to start production in 2018 and will feed the gas to a floating plant with output capacity of 2.5 million tons.

- Fitri Wulandari and William Mellor, Copyright 2013 Bloomberg.

*3rd Update* Via Skaugen – 16 Feb 2013

“We do sincerely regret the loss of lives and we do consider it an avoidable accident that should not have happened and we regret the part we played in it. The ferry Bahuga Jaya was 40 years old and evidently not maintained for its trade and it was probably unseaworthy and did most probably sink for reasons of fatigue or construction failures.  The sinking caused in our views the loss of lives and not the collision itself.  The loss of lives was also caused by the lack of proper procedures on the ferry to evacuate passengers in an emergency and with inadequate lifesaving procedures and equipment.

The available data from the VDR data (Black Box) on our ship makes it possible to reconstruct the events leading to the collision. From this it is evident that our vessel is not the vessel that caused the collision. The aftermath has also proven to be very challenging due to a far from transparent juridical process in Indonesia and we are still waiting for the ship and its crew to be released. The long delays in release of the ship are costly for our Company and the loss of earnings amount to USD $400,000 / month with full operational cost of the vessel with full crew and with cargo of liquefied gasses on board.  This complex and not very transparent process in Indonesia makes it appear much more like a “hostage situation”. It is needed to designate the most senior management` attention on settling the issues, with support from and in cooperation with the insurance companies we have, and that is also difficult for a smaller company like ours.”

Previously reported (from September 2012)

Norgas Carriers Private Limited released a statement on 27 September confirming its managed vessel, the Norgas Cathinka, is now anchored safely at Merak Roads, Indonesia and that investigations into the incident are continuing.

The master of the Norgas Cathinka, its chief officer and an ordinary seaman are continuing to assist local police in their investigations into the incident in which the vessel was in collision with a Ro Ro Passenger ferry which later sank.

Norgas Carriers has appointed a leading firm of international maritime consultants to conduct an independent investigation and the National Transportation Safety Committee of Indonesia has now assumed responsibility for the independent inquiry into the incident.

Local reports continue to say that eight people are still missing presumed dead.

Local reports alleging the Norgas Cathinka did not stop immediately following the incident were quickly quelled by Norgas Carriers who stated today, “The company wishes to point out the Master has reported the Norgas Cathinka stopped as soon as it was safe to do so following the incident.”

Allegations to the contrary, they note, “is speculation and does not help in the authorities’ efforts to conduct a fair and impartial investigation.”

Morits Skaugen, Chief Executive Officer (CEO) of IM Skaugen, said today: “Our sole aim here is to ensure that the absolute truth comes out about the events which led up to the accident on September 26.

“It is our firm intention to co-operate in every way we can with the on-going investigations in Indonesia. It is important the investigation is impartial and contains all the facts.”

“I believe the outcome of the investigation will uncover the full truth of the incident and that our Master did everything he could under the circumstances after the incident.”

Norgas Carriers, which is a wholly owned subsidiary of IM Skaugen, also confirms the existence of a Voyage Data Recorder (“Black Box”) on the ship’s bridge and the data from this will be jointly taken from the ship in the presence of Indonesian National Transportation Safety Committee representatives.  The Harbour Master at the Port of Merak and his technical representatives will also be present at this hand over.

Image courtesy I.M. Skaugen

The collision occurred in the Sunda Strait near the port of Merak, Indonesia.

The initial report is as follows:

The master of the Norgas Cathinka has reported the crew and vessel are safe, but that a number of passengers on the ferry are reported missing.

According to the Indonesian Transportation Ministry, eight people have died as a result of the collision with 208 reported survivors.  The ship’s manifest showed a total compliment of 213 passengers and crew, however Indonesia ship manifest records are notoriously inaccurate due to tickets being sold on board and unregistered passengers.

Structural damage to the Norgas Cathinka was reported by the ship’s master, however according to the company’s statement, there has been no ingress of water and the ship is in no danger of sinking.  The vessel is carrying a cargo of Propylene.

The following is video showing a few of the survivors being rescued, 10 nearby vessels responded to the distress call.

Click here to view the embedded video.

I.M. Skaugen told reporters this afternoon [26 September] that the Norgas Cathinka will be evaluated by Flag State and Classification society surveyors to confirm the seaworthiness of the vessel and the integrity of the cargo. Upon such approval, the vessel will then be relocated in cooperation with the authorities to a safe anchorage when the investigation into the incident will continue.

Morits Skaugen, IM Skaugen’s Chief Executive Officer, commented, “I wish to personally place on record my regret and sorrow over this sad and unfortunate incident.

I also wish to offer my condolences to the families who have lost loved ones today and stress again that as a responsible ship owner for almost 100 years, it will be our company’s absolute duty to discover the truth about how this happened.

We shall be unstinting in our efforts to discover the facts of the incident and we are giving full co-operation to the investigations into the incident which continue”.

The nine men had been in limbo off Singapore aboard the Liberia-flagged cargo ship that saved them after their vessel sank in Myanmar waters. Singapore authorities this month denied entry to them and 40 other survivors rescued from the shipwreck by a Vietnamese freighter, highlighting the wariness among Southeast Asian governments to accept asylum seekers from a recent exodus caused by ethnic violence in Myanmar.

Image via MarineTraffic.com

Indonesian authorities Sunday sent a vessel to take the nine men off the X-Press Hoogly in waters off the archipelago nation’s Batam Island, according to an official at the cargo ship’s owner, Hammonia Reederei. The Hamburg-based shipper had previously appealed to Singapore and other unnamed countries to take the nine men in, but to no avail.

Indonesian officials weren’t immediately able to confirm the move, but a spokesman for the country’s immigration office said the agency would typically house such people at an immigration detention center, verify if they qualify as asylum seekers and ask the United Nations refugee agency to seek an alternative asylum destination for them.

The nine men were part of a group of 49 survivors that had been aboard the Nagu, which was carrying about 250 people when it sank Dec. 5 after making a port call in Myanmar’s western Rakhine province and was bound for Malaysia, according to the Indian coast guard. The Rakhine region has been embroiled in violence in recent months that has left tens of thousands of minority Muslim Rohingya people homeless.

The 40 other survivors, rescued by the Vietnam-flagged Nosco Victory, were taken in by Malaysian authorities Dec. 18 after appeals from the U.N. refugee agency and that ship’s owner, the Northern Shipping Joint Stock Co., or Nosco. They are currently being housed in a detention center, but it isn’t clear what Malaysia plans to do with them.

The U.N. refugee agency plans to seek access to the 49 men and provide assistance to them, including determining if any of them are in need of international protection, said Vivian Tan, a Bangkok-based spokeswoman for the U.N. High Commissioner for Refugees.

It isn’t clear whether the survivors are Rohingya, whose plight has put pressure on Myanmar’s government. The 40 men saved by the Nosco Victory say they are Muslims–16 to 45 years old–from Rakhine state, according to a manifest seen by The Wall Street Journal and prepared by a marine insurer, which interviewed the survivors. The nine aboard the X-Press Hoogly are all male, but their identities weren’t clear, the Hammonia official said.

The incident comes as civil-society groups warn that growing numbers of Rohingya refugees are fleeing Rakhine by boat to nearby countries, prompted by Bangladesh’s continued closure of its border. Some recent attempts have ended in tragedy, including an October sinking in which about 130 Rohingya were reportedly killed.

Singapore, Malaysia and Indonesia aren’t signatories to the U.N. Convention on Refugees, which establishes a basic framework for protecting people escaping persecution. The convention bars signatories from expelling recognized refugees–with some exceptions–or punishing refugees for illegal entry.

Singapore has in the past said it couldn’t accept refugees and asylum seekers because of its small size and limited resources, although it would help such people find other asylum destinations. Malaysia, meanwhile, has become a reluctant host over the years to some 24,000 Rohingya, who form one of the largest refugee groups in the Muslim-majority country, where asylum-seekers are vulnerable to arrest for immigration offenses, according to the U.N. refugee agency.

The Nosco Victory and the X-Press Hoogly had been scheduled to stop in Singapore earlier this month, but the city-state’s Maritime and Port Authority said it had denied both ships entry because the rescued men onboard both vessels “do not appear to be persons eligible to enter Singapore.”

But the Authority said Monday that it has now given the X-Press Hoogly permission to enter Singapore’s port after being notified by the ship’s owner that the nine rescued men onboard have disembarked.

-  by Chun Han Wong, Celine Fernandez in Kuala Lumpur and I Made Sentana in Jakarta contributed to this report.

(c) 2012 Dow Jones & Company

Image courtesy North Sea Boats

At the end of August, Indonesian composite shipbuilder, North Sea Boats launched one of the most unique warships in the world from their facility in East Java.  Measuring 63m in length, the KRI Klewang bears a similar look to the Austal USA-built LCS-2 when viewed from the bow, however the similarities don’t extend much further beyond the fact they are (were) both painted haze grey, and have three hulls.

Image courtesy North Sea Boats

With a wave-piercing hull form built of carbon fiber composite, and powered by 4 MAN Diesel engines, the KRI Klewang was a high performance machine and the result of two years of R&D by New Zealand naval architect firm, LOMOcean Design Ltd.

Unfortunately, this one-of-a-kind, USD $11.91 million vessel is no longer after a fire broke out on board a few days ago.

Click here to view the embedded video.

No details are available yet on how this blaze started.

Image via AMSA

More than 120 asylum seekers may have drowned off Indonesia, according to the Australian government, which is reopening offshore detention centers in an attempt to deter refugees from attempting the boat journey.

“There were up to 150 people that were aboard this vessel,” which is believed to have sunk, Home Minister Jason Clare told reporters in Sydney today. “There is a massive search and rescue effort going on right now just off the coast of Indonesia.”

The HMAS Maitland has recovered 16 people, the Australian Maritime Saftey Authority said in a statement on its website. Six survivors were recovered by a merchant vessel earlier today.

Almost 1,000 asylum seekers, often from war-torn Middle Eastern and South Asian nations, are known to have drowned in the waters between Indonesia and Australia since 2001. While the number of people seeking asylum in Australia is dwarfed by applications to the U.S., the issue has dogged Prime Minister Julia Gillard’s government, which is clawing back from near record-low approval ratings before elections due next year.

The fatalities, which have ramped up in the past three years, this month spurred Gillard to reverse her previous stance by passing legislation to send asylum seekers arriving by boat to camps on the South Pacific island of Nauru and Papua New Guinea for processing.

Nauru Deal

Gillard, in the Cook Islands for the Pacific Islands Forum, signed a memorandum of understanding with Nauru to establish a processing center, she said in an e-mailed statement today.

The arrangement “sends a clear message that countries in this region are working together towards a lasting regional response in taking action necessary to undermine people smuggling networks, stop those dangerous boat journeys and prevent the loss of life at sea,” she said.

The shift in policy was criticized by human rights campaigners who said the new laws were arbitrary and discriminatory. About 604 people lost their lives since October 2009, according to an independent report presented to the government this month.

The minority Labor government has also come under attack from the Liberal-National opposition as increasing numbers of refugees pay Indonesian smugglers to ferry them in overcrowded boats to Australia.

Pacific Solution

Processing refugees in Papua New Guinea and Nauru marks a return to former Prime Minister John Howard’s so-called Pacific Solution that was scrapped after Labor won office in 2007.

While asylum seekers have been arriving by boat in Australia since the Vietnam War in the 1970s, the issue became more politicized about a decade ago when Howard’s Liberal- National government detained refugees, including children, in offshore processing camps or in detention centers in remote areas.

Some asylum seekers responded to their detention with riots, suicides and by sewing their lips together to protest, with a United Nations report released in 2002 saying their treatment was “inhumane and degrading.”

In August 2001, Howard refused to allow 430 asylum seekers on the MV Tampa, a Norwegian freighter, to enter Australian waters and ordered soldiers to board the ship. His bid to deter people smugglers included orders to the Navy to “turn back the boats,” a phrase current Liberal-National leader Tony Abbott repeats today as opposition policy.

Abbott has blamed Labor’s closing of the camps for a rise in the number of refugee boats arriving and fatalities.

The nation received 15,441 asylum applications last year, compared with 60,587 in the U.S. and 43,759 for Sweden, according to the Refugee Council of Australia. While the political debate is focused on so-called boat people, 6,316 people seeking asylum in 2010-11 arrived in Australia by air, compared with 5,175 by boat, the council says.

Under laws passed Aug. 17, Australia will increase its annual refugee intake to 20,000 from about 13,700 now. Gillard intends to start processing of refugees at Nauru and Papua New Guinea next month.

HMAS Wollongong

While transiting from Singapore to Christmas Island, HMAS Wollongong was tasked to respond to a vessel in distress which was eventually located approximately 52 nautical miles southwest of Tanjung (Cape) Layar, West Java.  The Australian warship remains in close proximity to the vessel this morning and is continuing to monitor it closely. The Australian Maritime Safety Authority reports the vessel is slowly travelling south towards Christmas Island under its own power.

Australian Home Affairs Minister Jason Clare said the distress call was received at 4.30am today when the boat 50 nautical miles south of Indonesia.

”The boat has rung, said it’s in distress, that it’s taking on water,” Mr Clare told ABC Radio. ”Whenever you have a call like that, you take it seriously.”

Though there are no obvious visual signs that the vessel is in imminent danger, a full on-board assessment has not been made due to poor weather conditions in the area.

HMAS Leeuwin remains en route to the area in order to provide further support and is due to arrive this evening.

Image: DNV

The UK P&I Club has announced that legislation has been passed in Indonesia which purports to place a ban on the expert of minerals from Indonesian ports, unless the shipper has been granted a specific export permit. The cargoes which may be affected include nickel ore, bauxite and iron ore. Reports suggest that ships which are scheduled to load or are in the process of loading ore cargoes may be subject to delays where the exporters of the cargo do not possess the relevant permit.

There is a great deal of confusion as to the overall impact of the legislation and the UK P&I Club managers are continuing to investigate the matter with local correspondents.

Has your ship been directly affected by this?  

Email us at info@gCaptain.com and let us know what the situation is…

Image courtesy APM Terminals

JAKARTA (Dow Jones)–Indonesia needs to move quickly to expand and modernize its ports to keep up with a recent increase in exports and imports generated by the archipelago’s sustained growth, the country’s trade minister said Tuesday.

The country’s current ports are already overstretched and will become bottlenecks to further trade expansion if Indonesia doesn’t build better infrastructure, Trade Minister Gita Wirjawan told a group of reporters Wednesday.

Jakarta’s main port of Tanjung Priok, for example, needs to more than triple its container handling capacity in the next seven years, if it is going to keep up with expected growth in Southeast Asia’s largest economy.

“We have to ramp up our capacity or we are going to suffer,” he said.

Indonesia’s gross domestic product expanded 6.5% last year, its highest level in 15 years, and it’s expected to grow more than 6% this year, as the country’s increasingly-affluent middle class consumes more and high prices for coal, rubber and palm oil boost export receipts.

The growth is continuing despite slowdowns in the U.S. and Europe, and is now stretching the country’s outdated infrastructure to breaking point, economists and company executives say.

Chronic traffic jams clog the country’s cities while much of Indonesia has to deal with regular power outages. Backups at the many ports and on the highways and ferries of the sprawling archipelago mean that it’s often cheaper and faster to send a product from Jakarta to Singapore than to another city within the country.

To reduce the chances that overwhelmed ports don’t catch contaminated horticultural imports, Mr. Wirjawan said Indonesia next month will start asking that most imported fruits and vegetables be brought into the country and inspected at only four of its 14 ports.

While the produce that comes in by plane will be allowed in through Jakarta, the majority of the imports which come by ship through Jakarta’s port today will have to be diverted to other ports, such as far away Surabaya and Medan.

Some diplomats and importers complain this is a protectionist move aimed at blocking imports, but Mr. Wirjawan said the move is aimed at protecting the Indonesian consumer.

Bad infrastructure could also exacerbate inflation, economists have warned. Some are worried that Bank Indonesia, the country’s central bank, is getting ahead of itself and easing monetary policy too aggressively. The bank earlier this month surprised markets with a 25-basis point cut in its policy rate.

“Infrastructure constraints limit Indonesia’s growth potential and contribute to inflation by increasing transport, logistics and distribution costs,” said Deepak Gopinath, director of global market research at Trusted Sources, a London-based independent research company. “In eastern Indonesia, inflation is up to two percentage points higher than the national average, in part because of undeveloped transport infrastructure and high distribution costs.”

Last month, Indonesia’s inflation rate, as measured by the consumer price index, was 3.65%. It could rise as high as 7% in the next few months as high growth and bad infrastructure lead to higher prices, according to estimates by Trusted Sources.

Speaking to the Wall Street Journal, Mr. Wirjawan said that other than some upward pressure on rice and sugar prices, Indonesia’s inflation seems in check so far. Indonesia’s fiscal and monetary policy should help keep the country growing “without any seemingly real risk of inflating prices,” he said.

Another negative offshoot from Indonesia’s rapid growth recently has been labor unrest. Labor strikes across the archipelago have paralyzed everything from production at the mine of Freeport-McMoran Copper & Gold Inc. (FCX) to an industrial neighborhood near Jakarta. Workers across the country are asking for a bigger slice of all the new money the country is making.

Mr. Wirjawan, who is also the chairman of the country’s Investment Coordination Board, said that some foreign companies, particularly those from Korea and Taiwan, have threatened to move elsewhere if wages rise too high. But he expects unions, local governments and employers’ associations to come to agreements that will stop the strikes.

Despite some labor unrest, the country is so far on track to break last year’s record amount of close to $20 billion in foreign direct investment, he said. He said FDI this year will be 15% to 20% higher thanks to recent investment pledges, including South Korea’s Honam Petrochemical Corp.’s (011170.SE) plan to build a $5 billion complex in Indonesia. He said Korea’s Lotte group is looking at other investment options in Indonesia.

-By Eric Bellman, The Wall Street Journal

Indonesia's KRI Cakra 401 submarine

SEOUL (Dow Jones)–Daewoo Shipbuilding & Marine Engineering Co. (042660.SE) said Monday it is talking with the Indonesian government about the possible sale of KRW1.2 trillion ($1.1 billion) worth of submarines to the Southeast Asian country, in what could be South Korea’s biggest export of military equipment.

“We expect the talks to lead to a contract as we have a record of repairing two submarines for the Indonesian navy,” a Daewoo Shipbuilding spokesman said, adding the company would be the first South Korean shipbuilder to export submarines.

The two sides aim to sign a deal by the end of November following negotiations on technology and contract terms, the company said in a statement.

A deal with Indonesia would give Daewoo Shipbuilding access to other markets in Southeast Asia, where governments are stepping up efforts to build up their navies, said the statement.

Daewoo, the world’s No. 2 shipbuilder by order backlog of commercial ships, plans to build three submarines, weighing 1,400 tons each, at its Okpo, Geojedo-based shipyard for Indonesia if it wins the order, the spokesman said.

-By Kyong-Ae Choi, Dow Jones Newswires