Indonesiaâs mineral export bans face hot global fire
JAKARTA – Indonesia is under rising fire at the World Trade Organization and by the International Monetary Fund (IMF) for the government’s seemingly haphazard policy of banning mineral ore exports, a market intervention Jakarta insists is just and necessary to maximize its economic and industrial growth.
In a sharply worded statement accompanying its 2022 country report, the IMF called for Indonesia to phase out the restrictions and not extend them to other commodities. “The increasing use of trade measures and industrial policies may destabilize the multilateral trade system,” the IMF said.
The Joko Widodo administration has so far been unyielding, insisting that Indonesia is well within its rights to add value to its minerals, specifically nickel, bauxite, copper and tin, to become a newly industrialized state.
Nickel exports were banned in January 2022 and bauxite shipments followed on June 10. Tin and copper bans are scheduled to come next. “We have to dare to take these steps,” Widodo, a fervent advocate of the value-added policy, said last year.
Economic Coordinating Minister Airlangga Hartarto has described efforts by developed nations and international organizations to push for controls on other countries’ export policies as a form of modern-day colonialism that will inhibit Indonesia’s economic growth and development.
The WTO ruled last November that Indonesia’s restriction on mineral exports violated Article XI of the 1994 General Agreement on Tariffs and Trade, but US opposition means there is no mechanism to enforce the decision through the organization’s dispute resolution panel.
The European Union (EU), which brought the complaint to the WTO, said the nickel ban had unduly and illegally restricted EU access to raw materials needed for stainless steel production and, in doing so, had distorted the world market production of mineral ores.
The WTO panel has argued that Indonesia’s measures didn’t fall under the exemption for prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of products essential to Indonesia. What happens next isn’t clear, but Indonesia has made it clear it isn’t backing down.
Despite Indonesia’s large volume of mineral exports, the mining sector contributed only 5% to gross domestic product (GDP) in 2019. After the government introduced the nickel ban, the mineral’s value-added increased from US$1.1 billion to $20.8 billion in 2021 alone.
Predicting that figure would rise to more than $30 billion, Widodo said: “That is just one commodity. The government will continue to consistently carry out down-streaming so that added value is enjoyed domestically for the advancement and welfare of the people.”
He estimates the industrialization of bauxite, mainly found in West Kalimantan, will see revenues increase from $1.3 billion to $4.1 billion due to the value-added impact of the ban. Eight bauxite smelters currently under construction will boost existing production from 4.3 to 9.1 million tonnes.
But progress has been painfully slow and the government’s loss of patience in imposing the export ban may be because bauxite ore exports earned only $500 million in the first nine months of 2022, or 20% of the value of copper concentrate exports, which are already 95% refined metal.
Progress on copper giant Freeport Indonesia’s (PTFI’s) new $3 billion copper smelter at Gresik in East Java has been equally slow and is now due to be commissioned in May next year, the deadline for the export ban to go into force.
PTFI is alsomajority owned by the government, which in 2018 took a controlling interest from US mining giant Freeport McMoRan Copper & Gold, still the operator of the hugely profitable Grasberg mine in Papua’s Central Highlands.
Indonesian-owned Amman Mineral Nusa Tenggara is about halfway through building a third copper smelter at the site of the Batu Hijau copper and gold mine on the island of Sumbawa.
Critics of the policy point out, however, that one mineral ban won’t necessarily work for another. While it welcomed Indonesia’s value-added efforts, the IMF said they should be accompanied by comprehensive cost-benefit analysis and designed to minimize cross-border spillovers.
Brazil, Canada, China, Japan, South Korea, India, Russia, Saudi Arabia, Singapore, Turkey, Ukraine, United Arab Emirates and the US have all joined as third parties in the EU’s nickel dispute at the WTO.
America’s 2022 Inflation Reduction Act, marking the most significant action Congress has taken on clean energy and climate change, provides up to $7,500 in subsidies for electric vehicles (EVs) that contain a certain percentage of critical minerals processed in the US.
EU President Ursula von der Leyen has also recently proposed passage of a Critical Raw Materials Act aimed at addressing the 27-nation organization’s dependence on imports of critical raw materials.
Home to 22% of the world’s nickel reserves, concentrated in Sulawesi and Maluku, Indonesia’s ban has caused major shifts in the supply chains of EVs and on other strategic products such as rocket engines.
More than 75% of nickel is processed into stainless steel, but it is also critical to the manufacture of EV battery cathodes, which currently consume only 7% of global production.
It is for that reason that car companies are seeking to secure nickel supplies from Indonesia and other suppliers like the Philippines, New Caledonia, Russia, Canada and Australia.
The world’s two largest economies, the United States and China, have only limited reserves of nickel and rely heavily on the import of nickel ore or refined nickel.
China remains the world’s largest nickel importer, but over the past decade, Chinese companies have poured $14.2 billion into three major Indonesian processing complexes aimed at locking up supplies for the foreseeable future.
While Indonesia may have the world’s largest reserves, they mainly comprise class 2 nickel, which is not suitable for EV batteries. Recent efforts have been made to develop ways to convert class 2 to class 1.
The most effective process involves high-pressure acid leaching (HPAL) of the class 2 ore to produce mixed hydroxide precipitate (MHP), which is then further refined to where it can be used for battery cathodes.
The operation is costly, however, requiring large volumes of water and considerable energy – equivalent in this case to about a sixth of the capacity of Indonesia’s main Java-Bali power grid. It also produces toxic tailings.
The two main production facilities at Morawali, Central Sulawesi, and Weda Bay, Maluku, will eventually rely on 5,400 megawatts of coal-fired power, leaving potential customers questioning whether the process meets environment, social and corporate governance (ESG) standards.
Another major ESG issue is the environmental degradation arising from nickel mining in eastern Indonesia, which has turned the sea red in some areas and destroyed coastlines.
Meanwhile, Indonesia persists in its efforts to create a global nickel cartel, similar to that of the Organization of Petroleum Exporting Countries (OPEC), which seeks to coordinate the petroleum policies and outputs of member states to keep oil market prices high and stable.
Investment Minister Bahlil Lahadalia says Indonesian trade officials are in “intense talks” with three other unidentified nickel suppliers, following up on Widodo’s attempt to pitch the plan to the G7 summit in Hiroshima, Japan, where he was an invited participant.
“I hope G7 countries can become a partner in these industrial downstream policies,” he was quoted as saying on the Presidential Secretariat website. “It is time to establish an OPEC-like group for other products such as nickel and palm oil.”
Bahlil first proposed the idea of a nickel cartel to Canadian International Trade Minister Mary Ng on the sidelines of their G20 summit in Bali; Canada has two million tonnes of nickel reserves, with mine production reaching 134,000 tonnes in 2021.
The average price of nickel rose to a record $25,83418 a tonne last year, an increase of $7,000 over 2021 on the back of demand for batteries. Previously, the price had been linked to stainless steel production, peaking at $20,390 in 2012.
Noting that EV-producing countries implement their own protectionist policies, Bahlil says that Indonesia and other raw material producers want to ensure they gain the optimum added value from their inputs to the fast-accelerating industry.
