Indonesia Bans Ore Exports in Compromise Push for Metal Smelting

Jan 12, 2014 1:00 pm ET

Jan. 13 (Bloomberg) -- Indonesia’s ban on mineral ore exports will cut global nickel supplies and allow Freeport- McMoRan Copper & Gold Inc. to keep exporting copper concentrates.

Indonesia’s President Susilo Bambang Yudhoyono has signed a regulation for the ore ban, Energy and Mineral Resources Minister Jero Wacik told reporters, after an 11th-hour meeting of government ministers in Cikeas, West Java, on Jan. 11. The rule, which went into effect yesterday after months of wrangling, prohibits all raw ore exports and permits shipments of minerals that are processed or refined in the country.

The decision will ease concerns copper shipments may be disrupted and may push up nickel prices. Indonesia accounts for 3 percent of global copper supply, 18 percent to 20 percent of nickel and 9 percent to 10 percent of aluminum from bauxite, according to Goldman Sachs Group Inc. estimates.

“The law should clearly be bullish for nickel, as we should expect to see significant lower volumes of ore flow from Indonesia to China,” David Wilson, an analyst at Citigroup Inc. in London, said after the decision.

Nickel futures prices in London rose 3.3 percent on Jan. 10 to close at $13,860 a ton ahead of the expected ban by the world’s biggest mined nickel producer. Chinese ore stocks will become more valuable and many producers will not be able to use lower-grade ore from the Philippines as an alternative, Wilson said.

Diluted Curbs

Newmont Mining Corp. and Freeport, which runs the world’s second-largest copper mine in eastern Indonesia, can keep exporting concentrates, Wacik said. More than 60 companies that are planning to process ore domestically will also be allowed exports, Wacik said, without giving the purity levels that need to be met. Details will be published later, he said.

Freeport Indonesia has concentrate shipments set for Spain and the Philippines and expects export permits to be issued soon, its President Director Rozik Soetjipto said yesterday. Newmont’s local unit is operating normally while it waits for the official regulation document, spokesman Rubi Purnomo said.

The Energy and Mineral Resources Ministry proposed Jan. 8 that companies be allowed to continue shipping mineral concentrates for three years. The minimum level of copper in the concentrates may be set at 15 percent, according to Soetjipto, less than the percentage produced by Freeport and Newmont in Indonesia.

“Indonesia appears to be willing to allow miners who do some degree of processing or have definite plans for smelters in place to keep exporting but is still acting tough with the little guys,” Keith Loveard, a risk analyst at Jakarta-based Concord Consulting, said yesterday, pointing to around 4,000 companies with mining business licenses.

Ore Stockpiles

Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, said Jan. 10 that it stockpiled bauxite before the ban even as it expected the Indonesian curbs to be diluted because of the potential economic consequences. Indonesia will re-open exports as it has such a big impact, according to Li Haiming, president of the Hong Kong unit.

The government may not backtrack on bauxite and nickel as it is confident processing plants will come online, said Shaun Levine, an analyst at consultancy Eurasia Group in Washington.

Indonesia’s nickel-ore exports are mostly in the form of laterite with 1 percent to 2 percent nickel, according to RBC Capital Markets. In China, the ore is processed into so-called nickel pig iron, an alternative to the refined metal.

Nickel Prices

Chinese stockpiles of nickel ore are large enough to sustain the output of nickel pig iron through until at least the final quarter of this year, RBC Capital Markets said on Dec. 19, citing an estimate from researcher Wood Mackenzie. Indonesia’s Industry Minister M. S. Hidayat told reporters in Jakarta on Jan. 8 that China has 20 million tons of nickel ore in reserves ahead of the ban.

Nickel may average $15,500 a ton this year, according to an ABN Amro Bank NV report on Jan. 3 that cited the curbs in Indonesia and improved demand spurred by a global economic recovery. Last year’s average was $15,081 a ton as prices touched a low of $13,205 on July 9. Refined nickel prices fell 19 percent on the London Metal Exchange in 2013, dropping for a third year amid a glut to post the worst performance among major base metals.

The ban in Southeast Asia’s largest economy is intended to promote local processing, lure investment and spur the output of higher-value metal products.

The curbs could worsen Indonesia’s 2014 current-account position by as much as 0.3 percent of gross domestic product, Citigroup Inc. said last month, while Nomura Holdings Inc. said it will cost at least $5 billion in export revenue. Nickel and bauxite account for about 48 percent of total mineral exports, said David Sumual, economist at PT Bank Central Asia in Jakarta.

Current-Account Deficit

If the ore ban had been implemented in full, the current- account deficit would increase by about 0.6 percent of GDP, Sumual said. Persistent trade and current-account deficits last year made the rupiah Asia’s worst-performer in 2013.

“I think the rupiah has priced in for the total ban, meaning 0.6 percent of GDP, while the impact of the ore ban on the current-account deficit should only be 0.25 percent of GDP,” Sumual said.

The final decision reduced the impact of the rule on the country’s mining industry and economy ahead of national elections this year. Yudhoyono cannot run for a third term and has no clear successor, with Hatta Rajasa, the coordinating minister for the economy, Trade Minister Gita Wirjawan and State-Owned Enterprises Minister Dahlan Iskan among those vying to be potential presidential candidates.

Job Losses

“It is stereotypical of President Yudhoyono’s leadership style these last few years, namely to wait until the last second to decide on something,” said Eurasia’s Levine. “His decision to allow exports of some minerals and avert a possible economic catastrophe when the country can hardly afford it, is commendable.”

As many as 800,000 jobs may be at risk from the ban on shipments, the Indonesian Chamber of Commerce and Industry said on Dec. 16. It remains to be seen whether the government will be prepared to deal with the domestic fallout, Loveard said.

“There is also the potential for more challenges in the courts so it is unlikely that this is the end of the story,” Loveard said.

--With assistance from Agus Suhana in Cikeas and Eko Listiyorini in Jakarta. Editors: Neil Chatterjee, Marco Bertacche, Heather Langan