Mining in Indonesia: Smeltdown (The Economist – January 18, 2014)

 http://www.economist.com/

The government risks an export slump to boost the metals-processing industry

JAKARTA – INDONESIA’S government concedes that it will cause short-term damage; but on January 12th it went ahead and banned exports of mineral ores, at last implementing a law passed in 2009. Officials say that forcing mining firms to export only processed minerals will attract investment in smelters and refineries. After a year or so this will start to add value to the country’s exports, they say. But it is quite a gamble.

Indonesia has few smelters, and earns $5 billion a year by exporting unprocessed minerals such as copper concentrate, nickel ores and bauxite. The mining ministry had admitted that an outright ban on ore shipments would cut exports by $4 billion this year and $2.5 billion next. With the country’s current-account deficit last year hitting 3.5% of GDP, its worst since 1986, and its currency falling steeply, this is a bad time to be forgoing foreign earnings.

This may explain why the president, Susilo Bambang Yudhoyono, relaxed the moratorium at the last moment to let big copper producers keep exporting concentrate. (They will, however, have to pay stiff export taxes, rising from 25% this year to 60% in 2016.) Freeport Indonesia, an American-owned miner, had warned of a 60% cut in production at its Grasberg mine in Papua, the world’s fifth-largest copper mine, if the ban had been imposed in its original form. Freeport smelts about 40% of its output at Gresik in eastern Java, the country’s sole copper smelter, but it exports the rest as concentrate.

Concentrating minds

Another reason for waiving the restriction on copper is that, in contrast to some other metals, mining and concentrating it produces most of its final value: Nathan Associates, a consultancy in Washington, DC, says only 4-6% is added by smelting. So the potential upside from insisting that only refined copper be exported is slight relative to the downside of losing $2.5 billion a year of concentrate exports.

However, there are significant gains to be made by processing other metal ores. About 94% of aluminium’s final value comes from the refining and smelting stages, for example. Smelting adds a lot of value to nickel ore, too. But Indonesia will achieve these gains only if plenty of new smelters are actually built. Such plants are expensive, and require a lot of supporting infrastructure, such as power plants, ports and roads: Indonesia is terrible at building these. Moreover, world mineral prices are depressed and smelting margins are low.

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