Seeking greater long-term returns from its vast mineral resources, Indonesia opted for some short-term pain. It banned the export of mineral ores in 2014 and encouraged mining companies to build smelters. The aim: to transform from a shipper of low-grade raw materials to a manufacturer of high-grade products such as aluminium and copper cathode. The landmark export policy, announced in 2009, gave resource companies five years to hatch smelter projects that together will cost about $20 billion. Then last month, Indonesia delivered a surprise: It scaled back the export ban, sending ripples through the world’s metals markets.
1. Why the about-face?
Most mining companies missed the government’s deadline to build smelters, leading to a pile-up of lower-grade nickel ores (used in stainless steel) and bauxite (the principal ore of aluminum). That hit the government coffers and cooled economic growth.
2. So will there be an export free-for-all?
Not exactly. Permission to ship nickel ore and bauxite is limited to companies that are already building processing plants. Shipments will be permitted for a maximum five years. And only ore with nickel content less than 1.7 percent and certain grades of bauxite (linked to the progress of a mining company’s smelter projects) can be shipped. Exports of semi-processed metals such as copper concentrate will also be allowed, subject to conditions. Companies including Freeport-McMoRan will need to convert their contract of work into a special mining business license, and miners that haven’t already done so must build smelters within five years. Parts of the export ban remain in place, such as for high-grade nickel ore and iron ore.
3. Will metal ore prices suffer?
Refined nickel on the London Metal Exchange fell after the export ban was relaxed. But prices have rallied since the Philippines said it was going to close mines. Copper has risen on concern Freeport will cut output at its Grasberg mine, the world’s second-largest by reserves. Shares of Indonesian miners sunk after the policy reversal, but remain close to two-year highs. Analysts are struggling to forecast how the new rules will impact global ore supply because it’s unclear exactly how much more can be exported.
4. Have exports resumed?
A month on, and nothing’s moved yet. Freeport’s copper concentrate warehouses are full to the brim and the company is planning to cut output to the needs of its local smelter only.
5. Why the holdup?
Before fulfilling conditions that would clear the path for exports, Freeport wants assurances that the government won’t keep changing its policies. Miners still await official documentation to apply to export and to construct smelters. Nickel ore miners had been kept waiting on export tariffs until the government announced them yesterday.
6. Who are the winners and losers?
A jump in shipments will provide funds for mining firms struggling to fund their smelter projects. Aneka Tambang will be able to export its nickel stockpile. And bauxite miners can resume exports to China. If prices weaken, losers will include refined nickel producers such as Vale Indonesia and Sumitomo Metal Mining. While Freeport’s concentrate shipments are suspended for now and it’s having to stop some mining, the process of gaining a new license has a tangible benefit: The company can begin discussions about its long-term contract with the government, which expires in 2021, rather than waiting until at least 2019.
7. And the government?
Tax receipts should get a boost from the resumption of exports, helping to rein in the budget deficit. Linking the right to export to smelter construction should generate thousands of jobs and resonate with voters attuned to the government’s nationalistic leanings. The cost? Loss of face among global investors.
The Reference Shelf
- How Indonesia’s export rethink rattled global metals, miners.
- A report on how Chinese smelters find new bauxite supplies.
- Mineral export regulations issued by the Energy & Mineral Resources Ministry.
- A QuickTake explainer on Indonesia’s tax amnesty program.
- A QuickTake explainer on Indonesia’s rising tide of economic nationalism.