Indonesian Export Ban Likely to Hit Asian Metals Prices

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A flurry of reports in recent days has centered on new rules and regulations, as yet not crystal clear, that have been issued by the Indonesian authorities regarding the mining industry and exports of metallic raw materials.

According to Reuters, Indonesia has asked all miners to submit plans to build local smelters or to process ore domestically by 2014, when a total ban on raw mineral exports will take effect, or otherwise face an immediate ban on raw ore exports. The Reuters article states Indonesia will also impose a 20% tax on ore exports, although SkyNews says the figure is 25%, rising to 50% in 2013.

In addition, foreign miners will be required to divest half their assets after 10 years of operation, a move that will impact Indonesia’s standing as an investment destination if applied. Needless to say, exports among Indonesia’s 10,000 small- to medium-sized mining companies have come skidding to a halt, losing the country some $264 million in sales of nickel and bauxite.

Indonesia produced 14 percent of world nickel ore output, as well as 15 percent of bauxite ore and 3 percent of copper ore in 2011, according to industry data quoted in Reuters. Exports of raw tin had already been banned. The problem is most metal ores are exported raw to be processed into refined metals and products overseas, with Indonesia a major supplier to China, Japan and the United States. But such raw material exports generate only a fraction of the value possible if these ores were refined to primary metal grades.

The country’s top copper and gold producers Freeport McMoRan Copper & Gold and Newmont Corp. have recently been given permission to continue exporting ore, although they believe themselves outside of these new regulations as they hold a longstanding contractual agreement with the state that exempts them from changes in regulations. Principally, smaller firms will be most impacted; many claim they are not being allowed to export while their plans for domestic processing are being evaluated.

Indonesia supplied about 80 percent of China’s nickel and 53 percent of its bauxite last year, according to PwC figures quoted in the NY Times, so Chinese imports are expected to be hit hard from June onwards, although evidence suggests Chinese buyers stockpiled prior to the announcement, buying themselves a buffer while the situation was either resolved or they found alternative sources of supply.

Indonesian export duties of at least 20% will be applied to nickel, tin, gold, copper, silver, lead, zinc, chromium, platinum, bauxite, iron ore and manganese. Coal will be ruled upon separately, but the authorities are leaving open the possibility of a future tax on coal exports too.

Jakarta has probably been encouraged by the success of previous moves. The country has already imposed similar duties on exports of palm oil and cocoa beans, reducing exports of both and driving investment in domestic processing over the past year to produce higher-value products like margarine and chocolate.

The trend can be seen as part of a wider move towards resource nationalism as commodity producers seek to gain a larger share of the rewards for the finite resources under their ownership, but it does seem these latest rules have been rushed in without giving time for the industry to adjust and without the resources to assess refining plans once they are submitted. With some 10,000-15,000 small miners in the archipelago, the authorities are going to take months, if not years, to assess all the plans and proposals.

Indeed, their hope may be that the move will drive consolidation towards fewer, larger, and more environmentally responsible producers.

In the meantime, consumers will have to expect delays and contract cancellations as many suppliers fail to gain approval to resume exports over coming months.


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