London. It’s been over a year now since Indonesia imposed its ban on the export of unprocessed minerals.
The aim of the January 2014 lock-down is to generate greater value for the country and its citizens by forcing operators to build processing plants and export value-added product not raw materials.
Other resource-rich countries, such as the Democratic Republic of Congo, are travelling the same road but Indonesia is way out in front.
The country’s high-stakes strategy, implemented in the face of considerable opposition from both its own mining sector and overseas buyers, does appear to be largely working.
At a practical level flows of nickel ore and bauxite to Chinese buyers have been halted.
Indonesia’s mining ministry says there are now 11 nickel-processing projects under way, many of them backed by Chinese nickel and stainless steel producers.
The country’s two top copper miners, Freeport McMoRan and Newmont Indonesia, have been successfully cajoled into committing to a new copper smelter in return for keeping their mining rights.
When it comes to bauxite and the construction of alumina refineries, though, things are not going to plan with policy-makers admitting they may have to partially roll back the ban.
As with nickel, there was an initial flurry of alumina refinery project announcements in the immediate aftermath of the export ban.
All of them were backed by Chinese aluminium producers, who had been buying Indonesian bauxite to feed their own domestic production of alumina, the intermediate product in the aluminium supply chain.
The list of candidates included some of the biggest names in the Chinese aluminium sector such as Chalco, Xinfa and Nanshan.
One year on, though, and initial enthusiasm seems to have evaporated.
Indonesia does have one new refinery, built by local company Aneka Tambang and Japan’s Showa Denko. But it was started in 2011, years before the ban became a reality, and produces chemical-grade rather than metallurgical alumina.
All the other projects have gone, from an Indonesian perspective, ominously quiet, which is why policy-makers are now talking about trying to entice investment in return for bauxite export rights.
Even that strategy may not work because the simple fact is Chinese buyers are successfully tapping other sources of the mineral.
They haven’t yet fully compensated for the loss of Indonesian supply but Chinese imports have been steadily ticking higher in recent months, rising back above the 3-million-tonne per month level in both December and February.
In part this reflects higher imports from traditional suppliers such as Australia but in part it’s down to the emergence of new suppliers such as Malaysia.
In 2013 Chinese imports of Malaysian bauxite totalled just 154,000 tonnes. Last year’s tally came in at 3.3 million tonnes.
Malaysian imports have accelerated further this year, totalling 1.0 million tonnes in the first two months alone.
Similarly, the Dominican Republic never even used to make it onto the list of Chinese bauxite suppliers. Last year it did to the tune of 1.6 million tonnes.
The uncomfortable fact for Indonesia is that China may not need its bauxite any more. And if it doesn’t need the bauxite, it doesn’t need to sink investment into Indonesian alumina refineries.
The Scarcity Factor
That’s the thing with bauxite. It’s a commonly occurring mineral and a lot of countries have deposits of it.
Indonesia has no choke-hold over supply such as it enjoys over nickel ore.
Chinese nickel pig iron producers, the bedrock of nickel ore demand, have had some success in tapping the Philippines for alternative supply. But Philippine ore is lower-grade with all sorts of cost implications and the country simply can’t produce enough to fill the gap left by the Indonesian ban.
And apart from the Philippines, there is no obvious other supplier of nickel ore.
The scarcity factor is also in play when it comes to the country’s two big copper producers, particularly Freeport McMoRan.
Its Grasberg mine is one of the largest, longest-life copper mines in the world, an increasing rarity in a sector that is struggling to find replacements for the mega-mines of the past.
Faced with threats to withdraw its mining licence, Freeport had little option but to accede to Indonesia’s request it invest in a new smelter, however sceptical the company may be about the commercial logic of doing so.
With no such scarcity factor in bauxite, Indonesia may have reached the limits of its resource policy as currently formulated.
Less Stick, More Carrot
The problem is that the export ban is a blunt instrument through which to force its mining sector down the path of value-added processing.
Simply tweaking the ban for bauxite, by linking export licences to investment plans, is probably not going to work.
It might be time to evolve the policy further, applying a little less stick and offering a bit more carrot.
Alumina refineries cost a lot of money and require a lot of infrastructure. More than is needed to build a basic first-stage nickel ore processing plant to produce nickel pig iron, which is itself more raw material than value-added product.
Tax incentives and investment in power and transport are going to be needed if Chinese aluminium companies are to be persuaded to relocate part of their existing alumina capacity to Indonesia.
But the window of opportunity won’t be open for long with accumulating evidence the Chinese investment flow is switching to Malaysia and its replacement bauxite deposits.
With many other developing countries tracking Indonesia’s progress, bauxite is the clearest warning yet that coercion is only one part of a successful resource policy.
The opinions expressed here are those of the author, a columnist for Reuters.
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