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Power Dearth Threatens Indonesia Smelter Bids: Southeast Asia

A shortage of electricity in Indonesia may hamper President Susilo Bambang Yudhoyono’s plan to ban all raw-ore exports by 2014, as he seeks to increase revenue by forcing companies to refine locally.

More than 1 gigawatt of additional capacity may be needed to power the smelters required for the world’s biggest nickel producer and largest exporter of tin to process its ore, according to Xavier Jean, the Singapore-based associate director of corporate ratings at Standard and Poor’s. It may take longer than three years to build a plant capable of producing that much power, according to Nur Pamudji, president director of state utility PT Perusahaan Listrik Negara.

Asia’s second-biggest copper producer after China banned shipments of some metals on May 6, and the prohibition takes effect on all raw ore in 2014. The curb, combined with an export tax, is aimed at increasing revenue from higher-value processing. Japan, the second-biggest global buyer of nickel, has threatened to complain to the World Trade Organization about the restrictions.

“Project management complexity will increase substantially, as not only do companies need to manage the construction of large smelters but they also need to manage the construction of the associated power generation units,” Jean wrote in an e-mail to Bloomberg News this month. “The risk of delays is high, and that could force the government to pragmatically delay or tone down some of the recent regulations applied to the sector regarding the export of unprocessed ores.”

Ban Waivers

Indonesia banned exports of 32 types of unprocessed metals, waiving the restriction for companies operating under so-called mining business licenses that are planning to build local refineries. Those shipments are subject to a 20 percent tax. The country relied on mining for about 12 percent of its gross domestic product last year, according to data from the statistics bureau.

The government also ordered miners to register for an export permit that’s valid for three months, which includes a sales quota. Indonesia has issued 31 permits out of 68 registered exporters, including PT Aneka Tambang (ANTM), the country’s second-largest nickel producer, and local units of Freeport- McMoRan Copper & Gold Inc. and Newmont Mining Corp. (NEM)

Aneka Tambang fell 3.7 percent to 1,300 rupiah as of the noon break in Jakarta trading. PT Vale Indonesia (INCO), the country’s largest nickel producer, declined 3.7 percent to 2,575 rupiah.

The country’s June nickel exports dropped 80 percent to 572,106 tons from a month earlier, the trade ministry data showed. Indonesia’s copper exports declined 89 percent to 20,000 tons in the same month.

Java-Bali System

Listrik Negara sees Java as the most suitable place to build the smelters, as proximity to power stations is vital, Pamudji said.

“It would be better if the smelters are built on Java island where the supply is sufficient for the next several years,” Pamudji said at a meeting between mining companies and the chamber of commerce June 28. “Building new power plants with technology suitable for smelters will be very expensive.”

The Indonesia Chamber of Commerce and Industry puts the potential consumption at 1.5 gigawatts for at least 40 plants. 1 gigawatt can supply 769,230 Indonesian households at 1,300 watts per house.

The Java-Bali power system has a storage capacity of 29 gigawatts, while peak usage is only 20 gigawatts, Pamudji said at the time. Miners and the government are seeking to build the smelters near mines in Kalimantan, on Indonesia’s part of Borneo island, or Sulawesi.

Supply Commitment

Listrik Negara has committed to supplying power for smelters in other islands including Sumatra and Sulawesi, Thamrin Sihite, director general of minerals and coal at the Energy and Mineral Resources Ministry, said July 17.

As much as 74 percent of Indonesia’s population was connected with electricity as of March, according to data from Listrik Negara. That’s lower than the electrification ratio of Southeast Asian neighbors such as Thailand’s 99.3 percent and Vietnam’s 97.6 percent.

“If the smelters were built gradually, electricity supply could be sufficient,” Pradi Wigianto, a Jakarta-based energy and power system consultant at Frost & Sullivan, said in an e- mail interview. “Electricity supply in Java island would be able to meet demand for gradual development of smelters this year because of improved infrastructure.”

Regions outside Java would be able to meet demand in the next two-three years if smelters are willing to pay higher electricity tariffs because costs to build plants and produce electricity are higher than in Java, Wigianto said.

Shifting Burden

“What the government probably has in mind, in my view, is to partially shift the burden of power infrastructure spending to the mining sector,” Jean said. “The government probably expects miners to build large capacities in excess of their needs that can be reallocated to other sectors of the economy and to households through sales to the grid.”

The government has received 154 proposals since the rule took effect in May, up from 24 before the regulation, Sihite said.

Among companies that were planning to build processing plants before the May implementation are nine iron-ore smelting projects including PT MJIS in South Kalimantan and PT Jogja Magasa in Yogyakarta, Panggah Susanto, director general of manufacturing industry at the Ministry of Industry, said July 17.

Other projects include three copper smelters by PT Nusantara Smelting in East Java, PT Global Investindo in Papua and PT Indosmelt in South Sulawesi, Susanto said. There are also three alumina plants and three nickel smelters planned, all in eastern Indonesia, he said.

China Nickel Resources Holdings Co. (2889) plans to start construction of a steel plant in South Kalimantan province this month with an investment cost of as much as $1.5 billion, Indonesia’s Energy Minister Jero Wacik said June 21.

The central bank forecasts the country’s $847 billion economy will expand 6.3 percent to 6.7 percent next year, from 6.1 percent to 6.5 percent in 2012, Bank Indonesia Deputy Governor Halim Alamsyah said at a forum in Singapore July 20.

To contact the reporters on this story: Yoga Rusmana in Jakarta at yrusmana@bloomberg.net; Fitri Wulandari in Jakarta at fwulandari@bloomberg.net

To contact the editors responsible for this story: Greg Ahlstrand at gahlstrand@bloomberg.net

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