Indonesia’s resource extraction industry is a prime example of how confused and costly resource development can be when governments do not have a clear strategy or show consistency.
Billions of dollars of investment in alumina refiners is on the go-slow route following a legal challenge to the government’s mineral export ban imposed five months ago a Reuters article states. Indonesia’s Constitutional Court has yet to decide on the legal challenge against the Jan. 12 export ban on bauxite, nickel and other mineral ores imposed by the government, ostensibly to force mining companies to build refineries and processing plants.
Before the ban, Indonesian bauxite exports accounted for about 12% of global aluminum production, with China taking the bulk of the shipments for processing into alumina, an intermediate stage in the production of aluminum. Although the world is not short of alumina, low prices have depressed investment in new facilities elsewhere even as demand has risen.
Apparently as many as five alumina refinery projects are underway in Indonesia, industry officials said, but the legal uncertainty means firms have slowed their construction plans for the refineries out of fear that if the legal challenge is successful bauxite exports will resume and the rationale for the alumina plants will disappear.
Naturally investors are keen the ban should be upheld, but with presidential elections due next month the courts have been preoccupied with election-based lawsuits and the legal challenge has gone unresolved.
Currently, Indonesia has only one chemical grade alumina refinery, opened in April by state-owned PT Aneka Tambang. PT Well Harvest Winning Alumina, a joint venture between Indonesian conglomerate Harita Group and China’s Hongqiao Group, was initially expected to begin operations at its refinery in West Kalimantan in mid-2015 but that start date has now been pushed back to early 2016 at the earliest, according to Reuters. Another project by PT Bintan Alumina Indonesia is hoping to start operations at its 2 million-ton capacity alumina refinery by early 2017, but again that date may now be pushed back further thanks to all of the uncertainty.
China’s aluminum industry had stocked up with alumina and bauxite prior to the ban’s start in January. Those stocks are expected to last some 6-9 months, meaning consumers are probably not feeling any pain yet as they will have since accessed imports from elsewhere to supplement their inventories. Australian suppliers have the capacity to meet some of the demand but production costs in Australia are comparatively higher than Indonesia so smelters may be facing increased costs even as chronic overcapacity has already pushed higher cost Chinese smelters into the red.