Indonesia rolls out unwelcome mat to ore buyers
The ban on exports will merely encourage nickel and bauxite shoppers to look elsewhere.
The beauty of mining bauxite is that it is almost always found close to the surface in horizontal layers and can be strip-mined. That saves bundles for mining companies that only have to scoop up the ore, crush and wash it and ship it off for processing.
Nickel ore is also found close to the surface and extracted by open pit mining in quarries before being sent for processing.
All the nickel and bauxite mined in Indonesia is exported for processing elsewhere to make stainless steel. In fact, half the nickel ore used by China in the production of stainless steel stuff comes from Indonesia, as well as plenty of bauxite, and annual exports to the mainland top US$2 billion.
But here’s the problem. On Sunday, Indonesia introduced a ban on the export of all unprocessed nickel and bauxite in an attempt to force the mining industry to invest in smelters and refine the ore pulled out the ground before shipping it out.
Indonesia wants to create higher-level jobs and develop the mining industry in the country, but the move will result in short term pain with murky long-term benefits. There will be a serious impact on the Indonesian economy this year as jobs and much needed export revenue vanishes.
There is good news, but it belongs to other countries.
China anticipated the ban and kept a step ahead of Indonesia by stockpiling a year’s supply of nickel and bauxite. Reserves will obviously run down and the mainland has already started to look elsewhere. Top of its list is Australia where miners are dragging welcome mats out of storage and dusting them off as Chinese aluminium refiners come calling.
The ban was to have extended across all unprocessed mineral exports, but in a last minute softening Indonesia decided to allow producers of partially processed copper, zinc, lead, iron and manganese to export the ore until 2017. They will pay hefty taxes for the privilege, though, and after 2017, exports of minerals with less than 99 percent purity will be banned completely.
Investors have been keeping a close eye on international prices but there have been no major price increases so far. This is largely attributed to China’s building up of excess bauxite stock.
Foreign mining companies operating in Indonesia are not convinced that the ban will stimulate the domestic processing industry, saying that until the transport infrastructure is improved there will be no investment in ore processing plants in the country. Terrain and weather conditions in the vast archipelago present challenges to transportation, and huge investment will be needed in road and rail links and port terminals to accommodate any increase in bulk volumes. Containerised transport is also growing fast and will compete for these transport resources.
There is widespread expectation that Indonesia will further soften the ban as its effects on the domestic economy begin to be felt, but then it is an election year so anything is possible.