High smelting cost may have rebound effect on Indonesia's mineral export ban
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Indonesia’s ban on key mineral ores export (except the ones processed in Indonesia) risks backfiring as less commodity means it will not be cost-effective for aluminum producers to invest in expensive refineries and smelters.
The ban came into effect on the 12th of January, was unveiled in 2009 as commodities boom started to froth and Jakarta wanted to extract more value from the mineral resources it had. But metals prices and the margins have fallen ever since, leading to oversupply and less requirement to build more processing capacity.
Worried about the ban’s impact on the current account deficit as well as sagging rupiah currency, Jakarta made efforts to ease the ban last month only to be blocked by parliament. This month, the country issued exemptions to allow the shipments of copper, lead, zinc, iron ore concentrate and manganese leaving bauxite and nickel -the key ingredients in making aluminium and steel - the main targets.
Companies that consider building alumina refineries are going very slow as they weigh big investments required amid caution over Indonesia's policy flip-flops.
An alumina refinery worth 1 million-tonnes-a-year in Indonesia would cost about $1.5 billion to build. In order to recover from that investment, the price of alumina might be around $400 per tonne, said Michael Komesaroff, principal consultant at Urandaline Investments, noting alumina trades now at $325-$350 a tonne.
“It's not economic to construct an (alumina) refinery in Indonesia. The costs are too high, the bauxite deposits are too scattered to supply an in-situ refinery and the sovereign risk in Indonesia for such a capital intensive asset would be too high”, he said.
Indonesia, the biggest exporter of nickel ore in the world, refined thermal coal and tin, and is home to fifth-largest copper mine and also top gold mine. The Indonesian bauxite exports make up about twelve percent of the global aluminium output.
The trade ministry of Indonesia, said on Friday, no companies or miners had requested the approval for concentrate or even ore exports since Jan. 12 and there has been no concentrate shipments since then.
The ban will not depress the local prices but also damage the domestic industry it was initially designed to help. All in all, the ban will have a knock-on effect on the reduction of Indonesia's foreign exchange earnings. As far as jobs are concerned, smelters are not very big employers and they offer only a small return on the high investment.
