By Stuart Burns
In their mining industry's effort to mitigate the ore export ban coming into effect January 12 (as we reported earlier), the Indonesian government optimistically states that some 28 smelters are being built and will be ready by 2017, but in reality they will do well to have even half that number completed.
Freeport Indonesia, the local unit of US copper giant Freeport-McMoRan Copper & Gold (NYSE:FCX), is a case in point.
The firm already processes about 40% of its ore mined in Indonesia at a smelter in Gresik, East Java, and that incidentally is the only copper smelter in the country, according to the Jakarta Globe. Last year, the firm made plans to refine the rest of their ore with Indosmelt and Indovasi Mineral Indonesia, both currently developing a total of $3 billion in smelting and refinery plants.
Indosmelt's $1.5 billion plant is located in Maros, South Sulawesi, and Indovasi's $1.5-billion plant, still on the drawing board, may be located in Tuban, or Gresik, in East Java. Last year, Freeport Indonesia president director Rozik B. Soetjipto said the company requested the government to postpone the ban as two local companies can only commission the plants in 2017 (at the earliest) but Mr. Sukhyar's statements suggest the ministry is not for turning - or not yet, anyway.
China is the most likely to be hit by the ban's implementation, although the country has been stockpiling ore ahead of this month.
Chinese smelters have also been investing in new capacity in Indonesia, although it is still a long way from commissioning.
China buys much of its nickel ore and bauxite from Indonesia, receiving about 71% of its bauxite and 52% of its nickel ore from the country, according to Bloomberg. Buyers are reported to have been diversifying supply options, including suppliers in Australia, India and Africa, but must be hoping some form of compromise will be reached, at least for those miners that have started the development of domestic operations.
In the long run, most agree it will be to Indonesia's benefit if it can make the ban work and force investment into value-add operations.
Goldman Sachs is quoted as saying $30bn of domestic investment and related employment could spring from a successful program over the next three to four years. (Providing that the heavily indebted nation can maintain its international borrowing while simultaneously suffering a sharp drop in foreign exchange revenue in the interim.)
Although government debt as a percentage of GDP has fallen steadily for the last decade, external debt stocks, public and publicly guaranteed by the state, have risen in USD terms to over $120 trillion, more than India, Brazil, Turkey, South Africa or any of the other emerging markets except Mexico, according to World Bank data.
What This Means for Metal Buyers
Realism may yet force some level of compromise, but the conundrum remains that long-term gain will not be achieved without some level of short-term pain.