Indonesia looks to build up metals processing

A move by Indonesia to limit its raw minerals exports could hasten the development of a local processing industry, but the strategy has downside risks as buyers look to alternative sources.

A ban on foreign sales of key mineral ores, including nickel and bauxite, came into effect on January 12. Indonesia is a major global supplier of both minerals, accounting for 20% of bauxite production in the final quarter of 2013. Nickel is used in the manufacturing of steel while bauxite is a component in the production of aluminium.

In the months leading up to the effective date, there was some confusion in the marketplace, as the government vacillated on implementing the restrictions. The final regulation, issued by the Ministry of Energy and Mineral Resources, carved out exemptions for concentrates of copper, zinc, lead, manganese and iron ore, if they meet specified purity levels.

Restrictions on tin processing

The limits on foreign sales of mineral ores came in the wake of major changes to the processed tin market, where Indonesia is also a global leader. Last July, the government implemented new rules that raised minimum quality standards for tin smelters, followed by a requirement effective August 30 that all tin ingot trades be handled by the Indonesia Commodities and Derivatives Exchange (ICDX).

Response to the local trading rule has been mixed. Some smelters reacted poorly, saying it would increase warehousing and trading costs. But Sukrisno, the president-director of Timah, Indonesia’s largest tin exporter, told Bloomberg last October that the rule’s “objective is how we can create a reasonable price”.

Tin prices have been at historically low levels for a few years, leading Indonesia to idle some of its processing facilities in 2012.

Policies not without risks

The immediate effect of limiting trades to the ICDX was a slump in tin exports, although they recovered in the final two months of 2013, as more traders joined the exchange.

However, major buyers have started to look elsewhere for their tin and other minerals. China is seeking tin suppliers in Bolivia, Japan and Malaysia, and has turned to Africa for its bauxite requirements. Moreover, the Asian giant has had time to stockpile in preparation for the new regulations – according to international press reports, China has sufficient nickel reserves to last through the end of 2014.

The effect on Indonesia’s exports is potentially significant, with the changes coming at a time when the country’s trade balance has worsened. In December Citigroup said the ban on ore exports would cut the current-account position by 0.3% of GDP.

Investments necessary to boost processing capacity

While there could be short-term costs, such as a hit to the trade balance and government revenues, the larger question is whether Indonesia will be able to reap the expected longer-term gains. At present, processing capacity is not sufficient to handle local ore production, and a number of bauxite mines have halted operations since the ban, lacking access to smelters.

One factor that could slow the development of processing facilities is the significant financial outlay required. Nickel miner Bintang Delapan is currently building a 300,000-tonnes-per-year ferronickel smelter in Sulawesi at a cost of $1.2bn. Large-scale industrial projects also require extensive infrastructure and utilities backing, which are costly to the state and require time to put in place.

Some analysts have suggested that the government may try to scale back ore export restrictions at least in the short run, both to boost export revenues and to give investors time to build processing facilities.

This year’s round of elections, with legislative polls in April and the presidential vote in July, could also have an impact on investment decisions, but the lack of clarity should dissipate by the third quarter.

An improvement in political certainty would go some way toward easing investor nerves when it comes to developing the costly downstream processing facilities that Indonesia needs to realise its industrialisation goals.

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