Energy & Resources

Process management

Why new regulations in Indonesia could be a setback for Chinese industry


Not going to China anymore: a nickel mining area in central Sulawesi

Vivere pericolosamente was an Italian phrase used by Indonesian president Sukarno during a national day speech in 1964. It means ‘living dangerously’ and became better known in its English translation as part of the title of a film set during Sukarno’s overthrow, starring Mel Gibson and Sigourney Weaver. (Based on a novel by Christopher Koch, The Year of Living Dangerously was banned in Indonesia until 1999.)

Indonesia’s current president Bambang Yudhoyono has just inaugurated another treacherous year – as far as its miners are concerned – with a new policy preventing the export of many of the country’s natural resources. As a leading customer for many of the minerals now locked away by the ban, the Chinese will be worried by events too.

The restrictions stem from a law passed by the Indonesian parliament in 2009 giving mining companies five years to build smelters to process ores before they are exported to global markets. The goal is to ensure processing happens locally rather than abroad. The ban finally took effect on January 12 and despite a few last-minute changes (mostly softening the restrictions on copper and iron ore) the export of many other minerals is blocked.

The impact on sales of Indonesian nickel ore and bauxite is getting the most coverage, with Bloomberg reporting that at least 250,000 tonnes of nickel ore were mined in the Southeast Asian country last year but that only 16,000 tonnes were processed there. The disparity is similar for bauxite, which is used for making aluminium. The Indonesians complain that they are missing out on their rightful profits. About 94% of bauxite’s final value is derived from the refining and smelting stages, The Economist reported this month.

Hence Jakarta’s determination to show that it is serious about policing the new rules. In fact 21CN Business Herald has reported that authorities jumped the gun by preventing Chinese ships from leaving Sulawesi before the new policy went live. The vessels were only released when it became clear that they were carrying pre-ban cargoes.

The Chinese will be hardest hit by the new rules as they have been buying about 71% of their bauxite and 52% of their nickel ore from Indonesian sources. But although prices for the two resources have increased since the ban, they haven’t surged, in part because Chinese buyers have been careful to stockpile supplies. Estimates vary on how much has been hoarded but the suggestion is that China’s smelters have at least six months of reserves – much to the annoyance of Indonesian policymakers.

“I just returned from China and I saw with my own eyes three million tonnes of bauxite and 20 million tonnes of nickel ore over there,” Jakarta’s industry minister, MS Hidayat told reporters this month. “That’s what we want to stop.”

Miners in Indonesia warn that they don’t have the smelting capacity to meet the new targets. But the clampdown on unprocessed exports will be worth the short-term pain, R Sukhyar, director general of coal and mineral resources at the Energy and Mineral Resources Ministry, has insisted. Describing the ban as a “bitter pill that has to be swallowed”, he admits that exports might decline by $4 billion this year and by $2.5 billion in 2015. But the hope is that income from processed minerals could double by 2017 from the $4.9 billion estimated for this year.

Before that can happen the industry needs more investment, much of it from overseas as many of the country’s own miners can’t afford to build smelters. This might sound like a sweet spot for Chinese cash, although HSBC reports that China hasn’t invested as much in Indonesia historically as many other markets in Asia. It accounted for just 1.7% of the foreign capital going into the country in 2012, for instance.

Mining minister Sukhyar is more bullish, saying that construction has already started on 28 smelters. But the number is hard to track because promises in the press don’t always lead to concrete action. Foreign firms may also need more convincing that the Indonesians are going to persist with the current policy, making smelter investments worthwhile. If Jakarta stands firm, there might be a change of heart, although China has already invested heavily in its own smelting capacity at home. Alumina processing has grown from annual production of five million tonnes a decade ago to more than 24 million tonnes, with installed capacity even higher. Much of this growth is based on imported bauxite so producers will be cautious about spending on additional capacity outside China.

Some Chinese firms have taken the plunge. China Hongqiao is building a $1 billion smelter in Borneo, while Shandong Nanshan Aluminium is spending $5 billion on a new processing facility on the island of Bintan near Singapore. Both firms say the refinery plans are proof of their commitment to Indonesia and hope that this will get them earlier approvals to resume bauxite exports than their competitors.

Of course, the other option is to look for alternative suppliers. The Philippines is likely to be a key beneficiary when it comes to sales of nickel ores, although pig iron producers won’t be entirely satisfied by the switch because Filipino supply is generally lower quality.

For bauxite, it’s the Australian miners who look well positioned. “This is likely to lead to extra interest from overseas aluminium refiners, particularly in China, who would look to shore up their supplies of unprocessed bauxite,” said Miles Prosser, an executive director at the Australian Aluminium Council.

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