Mining in Indonesia
The government risks an export slump to boost the metals-processing industry
INDONESIA'S government concedes that it will cause short-term damage; but on January 12th it went ahead and banned exports of mineral ores, at last implementing a law passed in 2009.
Officials say that forcing mining firms to export only processed minerals will attract investment in smelters and refineries.
After a year or so this will start to add value to the country's exports, they say.
But it is quite a gamble.
Indonesiahas few smelters, and earns 5 billion a year by exporting unprocessed minerals such as copper concentrate, nickel ores and bauxite.
The mining ministry had admitted that an outright ban on ore shipments would cut exports by 4 billion this year and 2.5 billion next.
With the country's current-account deficit last year hitting 3.5% of GDP, its worst since 1986, and its currency falling steeply, this is a bad time to be forgoing foreign earnings.
This may explain why the president, Susilo Bambang Yudhoyono, relaxed the moratorium at the last moment to let big copper producers keep exporting concentrate.
FreeportIndonesia, an American-owned miner, had warned of a 60% cut in production at its Grasberg mine in Papua, the world's fifth-largest copper mine, if the ban had been imposed in its original form.
Freeportsmelts about 40% of its output at Gresik in eastern Java, the country's sole copper smelter, but it exports the rest as concentrate.
Another reason for waiving the restriction on copper is that, in contrast to some other metals, mining and concentrating it produces most of its final value:
Nathan Associates, a consultancy in Washington, DC, says only 4-6% is added by smelting.
So the potential upside from insisting that only refined copper be exported is slight relative to the downside of losing 2.5 billion a year of concentrate exports.
However, there are significant gains to be made by processing other metal ores.
About 94% of aluminium's final value comes from the refining and smelting stages, for example.
Smelting adds a lot of value to nickel ore, too.
But Indonesia will achieve these gains only if plenty of new smelters are actually built.
Such plants are expensive, and require a lot of supporting infrastructure, such as power plants, ports and roads:Indonesiais terrible at building these.
Moreover, world mineral prices are depressed and smelting margins are low.
Nevertheless, the government says that many new smelters are in the works.
China Hongqiao, that country's biggest privately owned aluminium producer, is building a 1 billion smelter in Borneo.
The Indonesian government says another big Chinese firm, Shandong Nanshan Aluminium, is investing 5 billion in a smelter, power plant and port on Bintan island.
As for nickel, when President Xi Jinping visited Indonesia last October he witnessed the signing of several agreements by Chinese firms to build smelters to produce the metal, used in making stainless steel.
This was a reminder of how dependentChinais on Indonesian nickel supplies, and a hint that it may be more interested in securing those supplies than in whether its companies make profits from the new smelting plants.
So although export bans are generally not a good idea, and using protectionism to foster “infant industries” is a policy that has produced more failures than successes, it is not impossible thatIndonesiawill achieve its hopes of moving its natural-resources industries up the value chain.
But at what cost in the meantime?
A little bit of resource nationalism may win Mr Yudhoyono's allies a few votes in the parliamentary elections scheduled for April and the presidential one in July.
But it may lose a lot more if many smaller miners, who cannot afford to invest in smelters, close down and cut large numbers of jobs.
If the short-term loss of export income exacerbates worries aboutIndonesia's current account, the consequences could be worse still.
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