Export ban in Indonesia and its effect
Starting 12th Jan’14, Indonesia’s ban on export of key mineral ores, unless processed in the country, came into effect and looks like the country is already bearing the brunt of this ban. The aim of Indonesia was to get more value for its mineral extracts but since the ban, mineral prices have fallen, margins are getting thinner, there is a situation of glut or oversupply and there are now fewer companies aiming to set up new capacities. Indonesia is the world’s biggest exporter of nickel ore, refined tin and thermal coal, and is home to the fifth-largest copper mine and top gold mine. Indonesian bauxite exports make up around 12 percent of global aluminum output.
It did allow some exemptions this month, allowing shipments of copper, zinc, lead, manganese and iron ore concentrate though it left nickel and bauxite, key ingredients in making steel and aluminum, from this exemption. As per Michael Komesaroff, principal consultant at Urandaline Investments, a refinery in Indonesia to process 1 million tons of alumina per year would cost around $1.5 billion to build. To recover that investment, even without making a profit, the price of alumina — made from bauxite ore — needs to be well over $400/ton. Currently alumina trades now at $325 to $350 /ton.
Since the ban came into effect, no new mines or companies requested approval for these ores and no major shipments have also set sail. If the ban continues, local prices are expected to fall, causing harm to the very same domestic industry it now seeks to protect. So if this ban was put in place to reduce trade deficit, it could have the exact opposite effect. Govt revenues too are expected to fall by around $820 million this year. Sometimes, exports are needed to protect domestic industries and this could be an expensive lesson which Indonesia might soon learn.