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March 29, 2016
The impact of Indonesia’s raw mineral ore export ban on global mining
By: Segran Pillay

Indonesia, like many countries blessed with natural resources, introduced a raw mineral ore export ban in January 2014, forcing miners to invest in downstream domestic smelters and refineries. This was an attempt by the country to bolster its manufacturing sector, as well as increase its role in influencing global commodity prices. While resource nationalization is nothing new, it does make the mineral sector less attractive for foreign investors. So how can miners minimize their risk in foreign investments?

The impact of the ban
Overall, the ban has led to a 20 percent decline in Indonesia’s mining revenues in 2015, with the bauxite and nickel sectors most impacted. Its mining sector’s contribution to GDP shrank to approximately 7.2 percent in 2015, following a healthy average of just over 11 percent in 2010 to 2012. This has had a significant impact on the Indonesian economy. The ban also has far-reaching consequences on other industries, as the Indonesian mining industry has strong forward linkages1 to the broader economy (see Figure 1). The sales of Indonesian mining industry output into other industries for intermediate use is significant.

Indonesian industries with strong forward linkages

To further understand the impact of reduced mineral exports, Accenture Research analyzed the hypothetical impact of a 20 percent drop in Indonesian mineral exports, using an input-output assessment.2 The results of our analysis indicated a -8.9 percent impact on total mineral output and, consequentially, a -0.7 percent decline in the Indonesian economy—a significant amount that would have far-reaching consequences for the economy and mining industry (see Figure 2).

Impact of a 20% reduction on mining exports to broader Indonesian economy

The prospect for change
It is important to note that since the introduction of the ban, Indonesia has offered some relief, allowing the export of some semi-finished products (e.g., copper concentrate) until 2017 in return for developing the facilities to process the minerals into metal end-products.3

However, the government also recently demanded that a tier-one miner sell a 10.6 percent stake in its mega-mine, which the miner subsequently valued at $1.7 billion.4 The government responded by saying it was an over-valuation. Along with other disputes related to expired export permissions, it is likely that this will stall the development of the mine.

Overall, the indication remains that there will be no production recovery in the medium term, while the country’s mining sector continues to contract into 2016. Miners, therefore, need to take heed.

How can miners better manage these investments?
Miners have become accustomed to periodic bouts of nationalism and contract changes over time. However, what should miners do to ensure their investments in frontier regions generate the acceptable return for themselves and for their shareholders?

Some possible solutions may include:

  • Conduct a robust due diligence when entering new markets. Invest upfront in a proper risk assessment of the market you are about to enter, and broaden your scope to include non-mining sectors.

  • Enter into bilateral-investment treaties, which provide reciprocal investment protection.5

  • Enter into double-taxation treaties where competing taxes exist.6

  • Include upfront local indigenous peoples’ participation. Acknowledging locals early on will improve your chances of securing a license to operate.

It is important to note that the relationship between the miner and the state determines the rate of investment, which in turn impacts project success.

The opportunity elsewhere
While this Indonesian export ban continues, other countries will benefit from the stance as the country loses market share. In turn, miners invested in these economies will benefit.

For example, Malaysia and Australia (for bauxite) and The Philippines (for nickel ores) are said to be filling the deficit created by Indonesia's export ban. The ban provides a disincentive to constructing domestic smelters and refineries, especially in a falling commodity price environment.

In addition, smelting investments will progress at a slower pace, further eroding Indonesia’s market share. And the country will lose further if China accelerates building its own smelting operations to process ores locally.

Perhaps it’s time for Indonesia to reconsider?

Footnotes:

1Linkages are determined from input-output modeling. A backward linkage is the amount by which an industry (e.g. mining) production depends on inter-industry inputs. Forward linkages describes the relationship where increased output from an industry  means additional amounts of product are available to be used as inputs to other industries for their own production.

2Input-output model developed using Indonesia Supply and Use Tables from World Input-Output Database.

3Raras Cahyafitri, Newmont gets green light to resume mineral exports, Jakarta Post, 20 November 2015. Factiva, Inc. All Rights Reserved. (Accessed 22 February 2016)

4Ben Otto and Deden Sudrajat, Indonesia to Weigh Freeport’s $1.7 Billion Offer for Stake in Local Unit, Wall Street Journal, 20 January 2016. Factiva, Inc. All Rights Reserved. (Accessed 22 February 2016)

5David Glennie of Blake, Cassels & Graydon LLP - How to mitigate the risks of resource nationalism, The International Resource Journal, http://www.internationalresourcejournal.com/north_america/how_to_mitigate_the_risks_of_resource_nationalism_write_david_gl.html

6 ibid

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