Indonesia is eyeing higher export levels in the second half of 2014, despite continuing concerns over the impact of a controversial ban on shipments of a key commodity.
On May 2, Indonesia’s statistics board revealed that the economy posted a $1.07bn trade surplus in the first quarter if the year. Just a few days later, a Bloomberg analysis of palm oil shipments found that exports in this key product had hit a four-month high of 1.85m tonnes in April.
Commodity prices rising again
Exports have historically played a key role in the economy. According to the most recent data from the World Bank, Indonesia’s exports of goods and services accounted for about 24% of GDP in 2012, with the main products being coal briquettes, petroleum gas, palm oil, rubber and crude petroleum.
The upswing in the early months of 2014 aligns with the optimism of officials on export growth. “I believe that our exports will be stronger in the second quarter,” Chatib Basri, the finance minister, told reporters on May 19. “This will be supported by the ongoing improvement in the economies of the US and Japan, as well as by the likely rebound in commodity prices due to the geopolitical crisis in Ukraine.”
His remarks on the commodities market come despite the impact of Indonesia’s decision in January to ban nickel exports, with the aim of promoting industrialisation and capturing more of the metal’s value chain domestically. Indonesia is the largest shipper of mined nickel in the world and at the time prices of the commodity were falling.
Ban effects starting to be felt
Coming alongside declining oil and gas sales – Indonesian producers will pump 804,000 barrels a day of oil this year, the lowest level since 1969 – the ban had prompted severe warnings from domestic miners.
In advance of its introduction, the Indonesian Mineral Entrepreneurs Association (Apemindo) said the impacts could include a fall of around $9.8bn in export earnings as well as an estimated 3.5m job losses should the ban come into force on January 12.
The actual picture that is emerging five months after the ban’s implementation is less clear, but some of the grim predictions appear to be becoming a reality.
London’s Financial Times reported in May that Harita, a family-owned mining conglomerate, and its contractors laid off nearly 5000 workers at a plant in Ketapang, West Kalimantan because of the ban. The World Bank also forecast in March that it would dent Indonesia’s trade balance by about $6bn this year and knock $6.5bn off government revenues in the period to 2017.
However, the Financial Times added that a new proposal by Oleg Deripaska’s Rusal, the world’s largest aluminium producer, to build another alumina refinery in West Kalimantan appears to suggest that the government’s policy is working, since it was “forcing companies to invest in billion-dollar processing facilities that they otherwise would not build”.
“Indonesia is proving its doubters wrong as the price of the metal soars and Chinese producers starved of raw material begin to ship equipment for processing plants to the South-east Asian nation,” wrote an op-ed in trade publication Metal Guru in May. Most of the nickel shipped to key customer China is refined there into “nickel pig iron”, a low-grade ferro-nickel used in stainless steel output.
Some have said that the ban will also boost the long-term performance of regions hit by the ban, while the country can always the re-enter the market when prices have recovered.
“With the planned construction of more smelters in the eastern areas, we shall see the establishment of additional industries there that will have a multiplier effect on the region’s growth,” Hendri Saparini, the executive director of the Center of Reform on Economics Indonesia, told the Jakarta Post.
The confidence and concern being generated by the soaring price of nickel – Citi investment bank has forecast nickel prices will surge 50%, hitting more than $30,000 a tonne next year – has led to speculation over another metal affected by the new ban: aluminium.
Bauxite is a key ingredient in aluminium, and Indonesia accounts for 60% of global supply. According to an analysis by Reuters in March, prices of the commodity are yet to leap because of existing supply. In 2013, Chinese bauxite imports jumped nearly 80%, and stockpiles grew to between 12 and 18 months of consumption, but these will soon run out.
Having resisted international and domestic pressure to repeal the ban, the onus will now fall on the victor of this July’s presidential election to decide whether to extend such protective measures or roll them back. Going by the evidence of recent trends, the government will likely be loath to step back from encouraging value-added production.
Follow Oxford Business Group on Facebook, Google+ and Twitter for all the latest Economic News Updates. Or register to receive updates via email.