For countries importing minerals, the big question is whether Indonesia would ban the export of unprocessed minerals. In its 2009 mining laws, the Southeast Asian country, abundantly rich in coal, bauxite, copper and nickel ores and tin, incorporated an obligation of "domestic secondary processing". Expectedly, the move invited much criticism from the Indonesian mining industry, as it caused a great degree of nervousness among countries importing minerals.
However, in the years since the condition that value would be added domestically by building refineries and smelters was incorporated, Jakarta has flip-flopped on how strictly it will enforce it. Even at this point, less than six weeks from the January 1, D-Day, the government and mining companies are engaged in brinkmanship. In the absence of a clear road map on how Indonesia should progressively promote local processing of minerals without disturbing the largely export-oriented mining operations, in May 2012, Jakarta had tightened export policies, besides imposing a 20 per cent export tax on bauxite.
As India is mineral-rich and raw material exports aren't finding favour with processing industries, the developments in Indonesia are being watched carefully by our miners. "The important thing isn't whether the Indonesian government or the mining industry will blink first on the proposed export ban. The local authorities could not be unaware that the country does not have infrastructure such as roads, ports and electricity to support the kind of investment Jakarta hopes to garner locally and from foreign groups to build processing industries," says R K Sharma, secretary general of the Federation of Indian Mineral Industries.
Indonesia is still seen riding its high horse on the mineral export ban. At the same time, more and more experts have come to believe the country, which cannot afford ruination of its minerals sector, will finally come up with a compromise formula that will allow groups to continue export of minerals after investment commitment in refineries and smelters.
But what about exporters without plans of downstream presence? Many suspect they will have to bear a very high mineral export tax. The Financial Times quoted an official of the country's chamber of commerce, Kadin, as saying, "Though Indonesian mining companies supported the government's aim of promoting investment in processing, the plan would only work if curbs on exports were brought in over a long period." In the meantime, Jakarta should make adequate investment in infrastructure to make Indonesia the "ideal destination" to build refineries and smelters. The government isn't unaware of the disconcertment it caused among importers when it stopped bauxite shipments for a few months last year. To convert bauxite importers from China, Japan and other places into investors in refineries and smelters, Jakarta will have to convince them of continuity in investment-friendly policies.
By now, the country should have realised it would be a big mistake to derail the mineral sector, which is to generate export earnings of about $10 billion this year. Proceeds from mining and metals account for six per cent of Indonesia's budget. This apart, as Sharma says, Jakarta cannot be oblivious to the need for collecting increasingly larger revenues from the minerals sector, in the face of declining income from oil and gas.
China, which had a share of 24.035 million tonnes (mt) in this year's global aluminium production of 49.834 mt, continues to depend heavily on bauxite imports for smelter feedstock alumina. In 2011, China imported 45.235 mt of bauxite, in which the share of Indonesia was 80 per cent. However, because of a spell of economic jingoism in the form of export suspension, the share of Indonesia in Chinese bauxite imports of 40.067 mt fell to 71 per cent last year. Chinese bauxite import dependence on Indonesia shrank to 67 per cent in the first nine months of this year. Continuing uncertainty on supply and export tax in Indonesia has led China to scout for bauxite elsewhere; it has also stepped up opening new bauxite mines. Imports from India rose to 1.925 mt in the first half of this year from 1.308 mt last year. China has rich bauxite resources. But the quality of the mineral from operating mines is steadily deteriorating. Beijing is not taking any risk on Indonesia. For it, the best way to placate Jakarta is by committing investment in downstream ventures. To this end, Shandong Nanshan is investing $5 billion to build a 2.1-mt refinery and a 530,000-tonne smelter in Indonesia's Riau Islands.
However, in the years since the condition that value would be added domestically by building refineries and smelters was incorporated, Jakarta has flip-flopped on how strictly it will enforce it. Even at this point, less than six weeks from the January 1, D-Day, the government and mining companies are engaged in brinkmanship. In the absence of a clear road map on how Indonesia should progressively promote local processing of minerals without disturbing the largely export-oriented mining operations, in May 2012, Jakarta had tightened export policies, besides imposing a 20 per cent export tax on bauxite.
| NAIL BITING |
|
As India is mineral-rich and raw material exports aren't finding favour with processing industries, the developments in Indonesia are being watched carefully by our miners. "The important thing isn't whether the Indonesian government or the mining industry will blink first on the proposed export ban. The local authorities could not be unaware that the country does not have infrastructure such as roads, ports and electricity to support the kind of investment Jakarta hopes to garner locally and from foreign groups to build processing industries," says R K Sharma, secretary general of the Federation of Indian Mineral Industries.
More From This Section
This is supported by a study by a consulting firm funded by the US Agency for International Development. In the most optimistic of the three scenarios in the study in case all the new processing capacity claimed by the government is operational by 2020, Indonesia would have a modest annual "net welfare gain" of $878 million. But in the process, there will be losses of about $33 billion to mining profits, government revenues and export earnings. More, any undue haste in building downstream refineries and smelters for which commercial prospects are suspect could only be by denying investments in infrastructure and social sectors such as health and education.
Indonesia is still seen riding its high horse on the mineral export ban. At the same time, more and more experts have come to believe the country, which cannot afford ruination of its minerals sector, will finally come up with a compromise formula that will allow groups to continue export of minerals after investment commitment in refineries and smelters.
But what about exporters without plans of downstream presence? Many suspect they will have to bear a very high mineral export tax. The Financial Times quoted an official of the country's chamber of commerce, Kadin, as saying, "Though Indonesian mining companies supported the government's aim of promoting investment in processing, the plan would only work if curbs on exports were brought in over a long period." In the meantime, Jakarta should make adequate investment in infrastructure to make Indonesia the "ideal destination" to build refineries and smelters. The government isn't unaware of the disconcertment it caused among importers when it stopped bauxite shipments for a few months last year. To convert bauxite importers from China, Japan and other places into investors in refineries and smelters, Jakarta will have to convince them of continuity in investment-friendly policies.
By now, the country should have realised it would be a big mistake to derail the mineral sector, which is to generate export earnings of about $10 billion this year. Proceeds from mining and metals account for six per cent of Indonesia's budget. This apart, as Sharma says, Jakarta cannot be oblivious to the need for collecting increasingly larger revenues from the minerals sector, in the face of declining income from oil and gas.
China, which had a share of 24.035 million tonnes (mt) in this year's global aluminium production of 49.834 mt, continues to depend heavily on bauxite imports for smelter feedstock alumina. In 2011, China imported 45.235 mt of bauxite, in which the share of Indonesia was 80 per cent. However, because of a spell of economic jingoism in the form of export suspension, the share of Indonesia in Chinese bauxite imports of 40.067 mt fell to 71 per cent last year. Chinese bauxite import dependence on Indonesia shrank to 67 per cent in the first nine months of this year. Continuing uncertainty on supply and export tax in Indonesia has led China to scout for bauxite elsewhere; it has also stepped up opening new bauxite mines. Imports from India rose to 1.925 mt in the first half of this year from 1.308 mt last year. China has rich bauxite resources. But the quality of the mineral from operating mines is steadily deteriorating. Beijing is not taking any risk on Indonesia. For it, the best way to placate Jakarta is by committing investment in downstream ventures. To this end, Shandong Nanshan is investing $5 billion to build a 2.1-mt refinery and a 530,000-tonne smelter in Indonesia's Riau Islands.