A controversial ban on the export of raw minerals from Indonesia has been relaxed, causing confusion and consternation in commodities markets.
By way of banning the export of some raw minerals, the Indonesian government hoped to force investment in smelters and processing facilities, which would lead to the export gaining in value, moving Indonesian industry up the value chain in the process.
This week’s relaxation of 2014’s ruling, however, allows the export of nickel ore and bauxite. This caused the price of nickel to drop by 5%, but will also spook international investors.
After 2014, many companies – mostly Chinese and Japanese – embarked on expensive smelter construction. By doing so, they were guaranteed access to Indonesia’s mineral bounty. Now, companies who had not made any such investment are permitted to resume exporting, so long as they can demonstrate plans to invest in the future.
“The immediate winners from the relaxation of the export ban appear to be larger players who have not yet constructed smelters, who may now export certain amounts of mineral concentrates,” Rick Beckmann, senior foreign counsel at TNB & Partners, a Jakarta law firm associated with Norton Rose Fulbright, tells GTR.
“On the other hand, the loudest criticism is from those who have already invested in the Indonesian smelter industry. Following the relaxation announcement, shares in smelter investment companies, together with nickel prices, tumbled. A major Chinese investor has indicated it is considering joint legal action against the Indonesian government with others impacted by the relaxation,” he adds.
It will also raise concerns for international mining companies, particularly those in Australia and the Philippines, which have taken advantage of the absence of Indonesian nickel from the markets.
The Philippines became the world’s largest exporter of nickel over the three-year period, toppling Indonesia from the top spot. However, its minerals industry has also been subject to political involvement, with the government cracking down on those mines not perceived to meet environmental standards.
Since Rodrigo Duterte became president in June 2016, a number of nickel mines have been suspended for operating irresponsibly.
In Australia, the additional nickel coming online from Indonesia will likely push prices down further still, affecting miners in Western Australia.
Beckmann says that while there are some concerns that Indonesian low grade nickel may now flood the world market, not all will lose from that.
“It is inevitable that the relaxation of the ban on ore exports will boost Indonesia’s trade and local economies and create new job opportunities for mine workers who were laid off when the ban was first introduced. And for China’s steel industry, easing the ban is likely to be welcome, if it ultimately drives down the cost of nickel,” he says.
One of the major takeaways from this is that the Jokowi government has flip-flopped yet again on mining policy. Investing in Indonesia is considered to be an administrative nightmare. Upon coming to power, Jokowi pledged to make it easier to do business and to attract more foreign capital. The latest revision will certainly lead to more complexity.
“The fact that there is no sustainability in the mining laws might discourage foreign investment,” says Brahim Zerouki, commodity trading director at Tricore Capital, who has significant experience of the mining laws and markets of the Southeast Asian country.
Under the new rules, companies that show progress towards building smelters within five years are permitted to export. However, they have to set aside 30% of smelter capacity for processing low-grade mineral with less than 1.7% nickel content and under 42% aluminium content.