(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON Feb 3 Indonesian minerals policy is
rarely a straightforward affair and so it proved again in the
run-up to the Jan. 12 ban on exports of unprocessed ores.
There was plenty of last-minute drama, particularly
concerning the treatment of copper concentrates. These were
first unexpectedly included in the ban and then granted an
eleventh-hour presidential exemption, but with an equally
unexpected caveat of rising export taxes.
And there will surely be more twists and turns in the story
in the weeks and months ahead.
Both of the major copper producers operating in the country,
Freeport McMoRan and Newmont Mining, are
challenging the government's right to change existing contracts
of work governing their operations at Grasberg and Batu Hijau
A local mining association, meanwhile, has wasted no time in
filing a legal challenge to the ban.
The really big surprise, though, is just how total the ban
is. Right up until the Jan. 12 deadline the consensus view was
that the Indonesian authorities would fudge the issue, most
likely in the form of wide-ranging exemptions to companies that
had displayed a minimum level of commitment to building
Not so, however. Such exemptions may come with time but for
now this ban bites as well as barks.
One of the expected restraints on Indonesian policy-makers
was the likely flow-through impact from the ban on a local
mining industry that is a major employer and a major revenue
generator for the country.
There was no shortage of dire warnings about mass lay-offs
and mine closures if the ban went ahead. Given the somewhat
parlous state of the Indonesian economy, there was widespread
scepticism that the government would really want to kill off
large parts of its resources sector.
Yet not only did the authorities go ahead anyway, but it is
becoming clear that they are fully prepared to countenance the
short-term pain for the longer-term gain of forcing the mining
sector down the value-added processing path.
The proof comes in the form of the mines ministry's
forecasts for minerals production this year.
Output of both bauxite and nickel ore, key export streams to
processing industries in China, are expected to collapse.
Nickel ore output is seen slumping from 60 million tonnes in
2013 to just 3.5 million tonnes this year. Bauxite production is
expected to contract even more dramatically from 56 million
tonnes to just one million tonnes.
Copper production is expected to rise from 450,000 tonnes to
640,000 tonnes, although ironically it is the copper market that
is experiencing the most immediate impact from the ban.
Both Freeport and Newmont thought their existing contracts
of work shielded them from future changes to Indonesian minerals
Now, however, they face the prospect of rising export taxes
on concentrate shipments and a complete ban from 2017.
Both have said they intend to engage with the authorities
with a view to finding, to quote Freeport Chief Executive
Richard Adkerson, a "mutually agreeable resolution".
But in the interim both have suspended concentrate shipments
and, unless a deal can be reached pretty quickly, both will have
to start trimming output rates.
Analysts at Barclays Capital estimate that the shipping
cessation could already have cost the market 45,000 tonnes in
supply in January. ("Metal Markets Outlook," Jan. 31).
Now, it's not as if the copper market is desperately short
of raw materials. Concentrates availability is as good as it's
been in many years thanks to a wave of supply arising from a
combination of expansions and new mines.
But it's noticeable that treatment and refining terms, the
fees paid to smelters for converting concentrates into refined
metal, have come off the boil in the last couple of weeks,
currently quoted at around $100 per tonne and 10 cents per lb.
There are no doubt other factors at work in the current
concentrates market, such as the absence of Chinese buyers
during the Lunar Year holidays and the return of the Philippines
PASAR smelter from an outage, but somewhere in the mix is the
halt to Indonesian export flows.
Quite evidently, the Indonesian component of the copper raw
materials market will only gain in significance with time.
NICKEL PRICE UP, DOWN, UP
Seven Chinese companies are planning to build nickel ore
processing plants in Indonesia, according to Xu Aidong, chief
analyst at state research house Antaike.
Which of course is precisely the point of the ban, lifting
the value of mineral flows through beneficiation.
But, contrary to expectations, there was no preemptive
exemption on the shipment of ore for those companies that have
already begun work on processing plants.
The ban right now is total and, judging by those official
production forecasts for this year, the mines ministry is not
expecting much to change.
The impact on the London Metal Exchange nickel price
might be said to have already been and gone. Three-month metal
surged from under $13,500 per tonne to almost $15,000 when the
market realised the full extent of the ban. The price has since
given back most of those gains, trading at around $13,900 per
tonne this morning.
And it might be argued that the ban is actually short-term
negative for the nickel price because it will discourage other
producers from curbing output in a structurally over-supplied
It may even encourage new supply, judging by Poseidon
Nickel's plans to return to a long-dormant deposit in
Moreover, everyone knows that Chinese importers had been
stocking up ahead of the January deadline, meaning there will be
no immediate hit on run-rates in the nickel pig iron (NPI)
sector, which is highly dependent on Indonesian ore supplies.
However, there is a secondary, less obvious price impact now
The price of that stockpiled nickel ore in China
AM-18C-NORE has already started rising in what is probably the
first sign of the potential for cost inflation in the NPI
The only market not to have yet blinked at the Indonesian
ban is alumina, the intermediate product sitting between bauxite
and aluminium in the production chain.
Chinese alumina refineries have built up an even more
impressive cushion against the disruption to Indonesian supplies
than their nickel counterparts.
Moreover, other sources of bauxite are available, most
notably Australia, where availability will be freed up by the
pending closure of Rio Tinto's Gove alumina refinery.
That said, there is an argument that Chinese buyers will
eventually have to tap Atlantic Basin supply to fully offset the
loss of Indonesian exports. That has cost implications for
bauxite, alumina and ultimately aluminium.
Particularly since there does not appear to be much rush to
build alumina refineries in Indonesia, a much higher investment
outlay than a nickel processing plant.
There is the potential for the ban to backfire in the
bauxite-alumina market, killing off the mining sector while
failing to stimulate investment in processing capacity.
But the key takeaway at this stage is that Indonesia is
evidently prepared to run that risk.
(Editing by William Hardy)