JAKARTA/SYDNEY Jan 27 Indonesia's ban on
exports of key mineral ores - unless they are processed in the
country - risks backfiring as weaker commodity prices mean it is
not cost-effective to invest in expensive smelters and
The ban, which came into effect on Jan. 12, was unveiled in
2009 as a commodities boom began to froth and Jakarta sought to
extract more value from its mineral resources. But metals prices
and margins have since fallen, leading to oversupply and less
need for building more processing capacity.
Worried about the impact on its current account deficit and
a sagging rupiah currency, Jakarta tried to ease the ban
last month only to be blocked by parliament. This month, it
issued exemptions to allow shipments of copper, zinc, lead,
manganese and iron ore concentrate, leaving nickel and bauxite -
key ingredients in making steel and aluminium - the main
Companies considering building alumina refineries are moving
slowly as they weigh the big investments required amid caution
over Indonesia's policy flip-flops.
A 1 million-tonnes-a-year alumina refinery in Indonesia
would cost around $1.5 billion to build. To recover that
investment, even without making a profit, the price of alumina -
made from bauxite ore - needs to be "well over" $400 a tonne,
said Michael Komesaroff, principal consultant at Urandaline
Investments, noting alumina trades now at $325-$350 a tonne.
"It's not economic to construct an (alumina) refinery in
Indonesia. The costs are too high, the bauxite deposits are too
scattered to supply an in-situ refinery and the sovereign risk
in Indonesia for such a capital intensive asset would be too
high," he said.
Indonesia is the world's biggest exporter of nickel ore,
refined tin and thermal coal, and is home to the fifth-largest
copper mine and top gold mine. Indonesian bauxite exports make
up around 12 percent of global aluminium output.
Indonesia's trade ministry said on Friday that no miners or
companies had requested approval for concentrate or ore exports
since Jan. 12 and no concentrate shipments have taken place
SOME WILL, SOME WON'T
The ban will depress local prices, potentially damaging the
domestic industry it was designed to help, and have a knock-on
effect on reducing Indonesia's foreign exchange earnings. In
terms of jobs, smelters are not big employers, and offer only a
small return on high investment.
The export ban could cut government revenue by as much as
$820 million this year, Indonesia's finance minister has said.
While Indonesia's bauxite industry could be crushed, some
nickel miners, starved of sales revenue as ore piles up and can
not be shipped, are speeding up plans to build smelters.
But here, too, the cost calculations don't look promising.
"It's very tough," said Maman Resman, spokesman for nickel
miner PT Bintang Delapan, one of the few miners to have started
building a smelter. "We're quite worried because this is
connected to a very large work programme."
The company is cutting costs and hopes to halve the timeline
for its $1.2 billion, 300,000-tonnes-per-year ferronickel
smelter project in Sulawesi, one of Indonesia's main nickel
producing regions. The project, which includes its own power
plant and infrastructure, is feasible so long as the price of
nickel is above $15,000 per tonne, the company said, adding it
expects nickel prices to increase.
Benchmark LME nickel was at $14,292 a tonne on
Friday, a nudge above recent 4-year lows. LME nickel prices are
seen rising 13 percent over the next 12 months, Goldman Sachs
said in a note dated Jan. 21. It sees prices averaging at
$14,800 a tonne this year and $15,125 next year.
Indonesia has issued business permits for 28 smelter
projects, according to the Investment Coordinating Board, but
only three are expected to come online this year. Various
planned projects have not got off the ground. The $5.5 billion
Weda Bay project in Halmaherah, which dates back to the 1990s,
is at least five years from completion, analysts say, because of
the high risk factors and relatively low nickel price.
But there is some hope. Indonesia is the largest exporter of
nickel ore to China's steel industry. Chinese nickel pig iron
producers turn Indonesian ore into a cheaper feed than refined
nickel for stainless steel. Several Chinese firms are speeding
up plans to build smelters in Indonesia to process nickel ore,
which has a higher metal content than ore from other nearby
countries such as the Philippines, making it cheaper to process.
"Unlike copper, where mines capture more than 90 of the
value of the concentrate, in selling nickel ore, the mine
captures only 15-20 percent of the value - so there's a much
more compelling argument in terms of the viability of making a
return on investment from constructing a nickel smelter," said
Andrew Mitchell, a consultant at Wood Mackenzie.
But for bauxite, buyers, including the Chinese, may simply
Unlike minerals such as copper, which is relatively costly
and complex to mine, bauxite is plentiful, with deposits close
to the surface making it comparatively cheap and easy to access.
"The Chinese are looking very seriously at mining bauxite in
Guinea, and that's a better economic deal for them than building
an alumina refinery in Indonesia," said Urandaline's Komesaroff.
China's Bosai Minerals exited a plan to build a 2
million-tonnes-a-year complex in Indonesia in 2012, focusing
instead on developing two existing bauxite mines in Guyana and
Besides the cost of building smelters and refineries, there
are big add-on costs for power stations, ports and roads. And,
with revenue from ore exports drying up, it will be tough to
attract investors for new facilities, warned Agus Suhartono, CEO
of Singapore's Ibris Nickel, which halted its Indonesian
operations on Jan. 7 pending clarity on the ban.
New smelting and refining investment "in the market
circumstances likely to prevail until at least 2020, have poor
commercial prospects," USAID, a U.S. foreign aid agency, said in
a report last April, noting companies would likely need to take
on debt financing for maybe 50-70 percent of the project cost.
"The difficulty the industry is going to have is access to
capital," said analyst Matt Fusarelli of consultancy AME Group.
"You're going to have to be pretty strong in your resolve to
put half a billion dollars into Indonesia in the current