COLUMN-Tin the template for Indonesia minerals policy: Andy Home
(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON Jan 13 (Reuters) - Indonesia's tin exports surged in December to a two-year high of 13,562 tonnes.
That was decidedly good news for global tin users.
The tin market is characterised by structural supply shortfall and Indonesia is the world's largest exporter of the metal. So when exports plunged in September due to a new raft of export rules, there was understandable consternation as to how long it would take for shipments to normalise.
A couple of months, it turned out. Full-year 2013 exports dropped by 7 percent to 91,613 tonnes, but that was much better than might have been expected when flows all but ground to a halt in September.
The rebound in exports at the end of last year will also, though, be construed as decidedly good news by the Indonesian authorities.
Following a 10-year war of attrition against the miners and smelters clustered on the tin-rich islands of Bangka and Belitung, the government has finally achieved its goal of eliminating exports of unprocessed tin. Everything that was exported in December was in the form of refined metal or tin solder and it was traded on a local exchange before shipment.
Tin is the historical template for the broader ban on exports of unprocessed minerals that kicked in this weekend.
As ever with Indonesian minerals policy, there has been last-minute drama in the form of a presidential decree exempting some minerals, most notably copper concentrate, and some operators.
But if tin is anything to go by, there should be no doubting Indonesia's commitment to forcing its mining sector into value-add processing, however tortuous the path in getting to that goal.
Tin, however, may yet prove to be a problematic template in terms of the longer-term future of Indonesia's mining sector.
******************************************************* FACTBOX: Indonesia issues regulations easing mineral export ban: TAKE A LOOK: Indonesia mining industry in disarray after export ban: *******************************************************
THE TIN WAR
The first shot in Indonesia's tin war was fired in 2002, when the government decreed a ban on exports of tin concentrates and ores. That was seven years before the 2009 law covering other minerals that is only now coming into effect.
The target of the tin ban was the host of small miners tapping the alluvial tin deposits on the islands of Bangka and Belitung. Mostly operating without any sort of government licence, they were accused of causing widespread environmental damage.
Over time the ban led to the proliferation of small-scale smelters, some of which proved as difficult to control as the miners.
Smelters were raided and some were forcibly closed for buying illegal ores. There were protests, sometimes violent, by affected workers. Quotas came and went, exports ebbed and flowed but the authorities gradually exerted increasing control over the fractured and fractious tin sector.
September marked the culmination of this long war of attrition with the implementation of minimum purity standards and a requirement that all exports first be traded on the Indonesian Commodity and Derivatives Exchange (ICDX).
Foreshadowing the uncertainty of the last few days, the details of the rule changes were only released at the eleventh hour.
The stipulation that tin had to be traded on the ICDX before shipment was a complete surprise and the prime cause of the sharp drop in September exports since so few players, either Indonesian or international, were actually registered with the exchange.
ICDX volumes have steadily increased from just 795 tonnes in September to over 8,000 tonnes in December.
That's partly thanks to a last-minute concession on the purity standards. The most liquid contract has been that for tin with a minimum lead content of 300 ppm. Under the original proposals exports of such metal would have been banned.
There may be some more tightening of the purity screws but for now Indonesia has largely achieved what it set out to do 10 years ago.
There's been similar drama with this weekend's ban on other unprocessed minerals with a presidential decree exempting some minerals and some local producers who have started work on building processing plants.
The exemptions to copper, zinc, lead and iron ore are only temporary, though.
Unprocessed exports will be banned from 2017 and there will be steep increases in taxes over the intervening period progressively penalising overseas shipments.
The concession benefits Freeport McMoRan and Newmont Mining, which operate the Grasberg and Batu Hijau copper mines respectively.
Both supply feed to the country's sole copper smelter/refinery but both are also large exporters of copper concentrates. Both are major local employers and both have argued with some justification that copper in concentrate form has already captured most of the value-add in the copper production chain.
But the lesson to be drawn from the tin war is that the Indonesian authorities are going to stick with the longer-term goal of forcing the local conversion of concentrates into refined metal.
That's a major headache for both operators and leaves a significant question-mark hanging over the nature and timing of future Indonesian copper supply.
A sign of that Indonesian single-mindedness is the fact that nickel ore exports have just been banned despite the inevitable negative impact on the local economy resulting from wholesale redundancies and reduced tax revenues.
As with tin, it seems, the authorities are prepared to take some short-term pain for the sake of the long-term gain.
And as with tin, there is a good chance the hard-line stance will be vindicated...eventually.
Indonesia can largely do what it wants with its tin sector because it knows there is no alternative supplier to grab market share.
Similarly with nickel ore. China's nickel pig iron (NPI) sector has become increasingly dependent on Indonesia for its ore because the country produces the quality required to feed the new generation of rotary kiln NPI plants.
Ore from the Philippines, the second largest supplier to China, is of a lower quality. And although China has stocked up on Indonesian ore ahead of this weekend's ban, those stocks will not last forever.
Assuming no more concessions, it is clear that Chinese operators will have to start investing in NPI facilities in Indonesia, if they want to continue using the country's ore.
A PROBLEM TEMPLATE
Indonesia, though, does not have a similar strangle-hold on other raw materials.
Chinese aluminium producers, for example, have also come to rely heavily on Indonesian bauxite. They too have built up significant stocks ahead of the ban.
But unlike their NPI peers, China's alumina refineries can look for alternative sources, a process that has already begun, judging by the recent growth in bauxite imports from the likes of Australia, India and West Africa.
Indonesia may get a couple of alumina refineries over the next few years, but there is an equal risk that it will simply lose out to other bauxite suppliers.
It is also quite possible that the world can live without Indonesian iron ore, if the investment case for building steel plants in the country doesn't stack up.
The success of Indonesia's tin policy, in other words, may not be so easily replicated in other mineral sectors. Only in nickel does the country enjoy the equivalent supply leverage necessary to force value-add processing.
Existing operators may have little choice but to go down that path, but future investors may think twice.
Fortunately for Indonesia, there are no obvious alternatives to the tin deposits of Bangka and Belitung or the type of nickel ore now relied on by China's NPI sector.
Unfortunately for Indonesia, the country does not have a similar monopoly on other minerals.
(Editing by William Hardy)