March/April 2014

Ban-demonium in Indonesia

Indonesia surprises the world by following through on ore export ban

By Herb Mathisen

One of Southeast Asia’s biggest mining nations is serious about wringing more value out of its mineral resources, and miners are scrambling to react.

It was a long time coming, but on January 12 Indonesia’s mineral export ban came into effect, essentially blocking outgoing shipments of most unprocessed ores. The restrictions were spelled out in the government’s 2009 mining law and adopted in an effort to promote local refining, processing and smelting. But in the five years leading up to the ban, few expected the government to hold firm on its commitment, and plants were not built.

“Everyone knew that it was coming in five years, just nobody believed it, to be honest,” said Jessica Fung, commodities analyst with BMO Capital Markets. “It’s unbelievable how, up until the last day, there were still a lot of skeptics out there, us included.”

Due in part to the inaction, the government has provided some flexibility with certain exports. For iron ore, lead, zinc, manganese, titanium and ilmenite below a specific purity level, a 20 per cent export tax will be slapped onto shipments. (For copper concentrates, that tax is 25 per cent.) This increases to 60 per cent by July 2016, until 2017, when a total ban takes effect for those unprocessed ores. Nickel, coal, gold and silver ore, however, were excluded from this exemption.

Phoenix-based Freeport-McMoRan, owner of the massive Grasberg mine, will delay exports of 40 million pounds of copper and 80,000 ounces of gold per month as it coordinates shipments to accommodate the country’s lone copper smelter, and awaits clarifications on whether the ban violates a contract it signed with the Indonesian government. Newmont, meanwhile, has reduced guidance at its Batu Hijau copper mine in reaction to the ban. In SEC filings, the company indicated it is currently in talks with the government to see if the new rules contravene its work contract. The company admits in its annual 10-K report that if the Indonesian government decides the ban overrides its contract, it “could result in a failure to obtain an export permit and potential impacts to operating plans at Batu Hijau.”

The ban certainly hurts operators working in Indonesia, but depending on how firmly it is enforced – and for how long – it could also have repercussions around the world. For instance, nickel producers and project promoters have cause to be excited, even if the price hardly budged after the ban was enforced, rising slowly in February from roughly $6.21 to $6.60 per pound.

“You take out 20 per cent of global mine supply and the price does absolutely bloody nothing,” said Andrew Mitchell, principal nickel analyst with Wood Mackenzie, during a presentation at PDAC in Toronto in early March. What accounts for this muted reaction, he explained, is that Indonesia has supplied demand for the majority of China’s nickel pig iron production growth in recent years and, in advance of the ban, China has been stockpiling unprocessed nickel. For instance, China imported 6,120,110 tonnes of nickel ore from Indonesia in January 2014 (an increase of 54 per cent year-on-year) of its total monthly import of 7,269,431 tonnes, according to numbers released by the General Administration of China Customs.

But as China’s reported stockpile of 20 million wet metric tonnes dwindles, and assuming the ban stays in place, Mitchell said he expected the nickel price to begin rising in late-2014. And while he said he believed China would make significant investments to build nickel plants in Indonesia, he foresees nickel moving to $11.20 per pound in the long term, based on an incentive price to develop new projects to satisfy demand.

One such project is Royal Nickel’s Dumont, which interim CEO Mark Selby shopped to potential equity and offtake partners during a recent trip to Asia. Located in the Abitibi region of Quebec, Dumont could be the fifth largest nickel sulphide mine in the world, and the company hopes it will be fully permitted by end-2014. In late February, Selby said Japanese plants were already feeling the pinch from the ban. “There are three ferro-nickel plants in Japan and 45 per cent of the feed for those plants comes from Indonesia, and they’re now living out what the ban means in a big bad way,” he said. “They are trying to find ore for their plants.”

One place Japanese and Chinese plants could look is the Philippines, but both Mitchell and Selby have said they think the country could likely only provide for 10 to 20 per cent of Chinese demand. “It doesn’t have the grades that Indonesia has,” said Mitchell. “There is no one that can replace Indonesia.”

BMO’s Fung said there are still events that could affect the ban including the country’s July elections: “In many ways, I think the reason for the prolonging of their view on this and maintaining this ban is because there are elections coming up and they want to show that they can generate longer-term value for their people and employment. It will hurt in the short term.”

But Selby suggested the ban is already beginning to have its intended effect. Royal Nickel’s Chinese partner, Tsingshan, is currently building a 300,000-ton-per-year smelter in Indonesia. “It will be the first decent scale plant to start up” when it opens in early 2015, he said, adding Tsingshan is putting financing together to build a second plant. “If (Indonesian authorities) change their mind at this point, those things would grind to a halt,” he said.

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