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Indonesia shrug off concerns over negative impact of raw minerals export ban

Publication Date : 05-05-2014

 

Three months after the introduction of a ban on raw mineral exports in Indonesia, officials have shrugged off concerns over the negative impact the policy may have on future overseas demand and on hurdles in the government’s attempts to create value-adding downstream industry.

According to Indonesia Energy and Mineral Resources Ministry director general for minerals and coal R. Sukhyar, as the largest supplier of low-grade nickel ore to China, Indonesia will not likely feel the pain from a looming plan by the world’s second-largest economy to cut its reliance on Indonesian ore in response to the ban.

After visiting China last week, Sukhyar told The Jakarta Post that investment from Chinese companies would continue flowing in, particularly to finance smelters for processing nickel, bauxite and alumina.

“China will keep looking for replacement supply from Africa and the Philippines. However, the amount will be limited to around 40 percent of their demand as we remain the biggest supplier,” said Sukhyar.

“That’s why they want to invest in smelters here.”

On Jan. 12, the government issued a regulation banning the export of unprocessed nickel and bauxite and imposing export duties on other semi-processed minerals.

The government said the ban was aimed at stimulating domestic smelting and processing capacity, which would add value to the country’s mineral exports, and thus contribute to higher economic growth, an improved trade balance, enhanced fiscal revenue and job creation.

However, a recent study by the World Bank has warned that the ban may only prompt an increase in smelter investment from Chinese Nickel Pig Iron (NPI) producers in Indonesia in the short term, provided that the considerable energy requirements for a smelter are satisfied.

“In the medium to long term, new smelter investments in Indonesia may be limited if Chinese NPI producers secure other sources of low grade nickel ore, such as from the Philippines, and Chinese stainless steel manufacturers substitute away from NPI,” said the report.

The report also suggests that for copper, lead and zinc, additional investment in processing appears unlikely to be economically viable in current conditions given low margins from global overcapacity in smelting and refining.

In addition, overseas processors are less compelled to invest as they can secure ore supplies elsewhere. Indonesia accounted for less than 2 percent of global production in copper, lead and zinc in 2012 and does not have a major share of reserves in any of these commodities.

Sukhyar, however, said he remained upbeat about investment in domestic processing for ore, citing huge planned investment by PT Freeport Indonesia to mine copper underground would eventually force the company to build a smelter.

Freeport and PT Newmont Nusa Tenggara are proposing to put down a combined US$125 million as a guarantee, or surety bonds, that they will process minerals domestically by 2017, in exchange for the right to export semi-processed ore.

Freeport is currently cooperating with state-owned PT Aneka Tambang (Antam) to work on a feasibility study for the development of a copper smelting plant that will have a capacity of 400,000 tons.

The plant is to accommodate copper supplies from Freeport’s underground expansion as well as from the Elang concession developed by Newmont.

“Freeport has said it would continue building smelters even if it has no partners. They cannot withdraw now because we have set that if the company does not comply with the law, they will face the risk,” Sukhyar said.

Sukhyar also said that investment from new players might not be needed as the government’s policies related to the export ban, particularly from the progressive export tax and surety bonds, had forced existing players to move to the downstream level.

Proceeds from the export ban policy depend on the completion of smelters, thus subjecting the country to several short-term tribulations resulting from the sharp decline in mineral exports due to the ban.

The World Bank has projected a negative impact on net trade of $12.5 billion and a total loss in fiscal revenue of $6.5 billion for Indonesia between 2014 and 2017. Moreover, imports of equipment and machinery needed to build the smelters will spike during that period.

Worries over the loss of jobs as an impact of the ban also continue to linger.

In a recent statement, Freeport said it would likely cut its workforce as the Indonesian unit had not yet resumed exports.

Critics have also warned that smelter development was capital, not labor, intensive.

The ministry’s director for minerals, Dede Suhendra, has rebuffed this claim.

“With downstream processes, demand for workers can increase by up to three times to operate the equipment and to function in other areas,” he said, adding, however, that it would take time for the absorption of new workers to occur.


 

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