Indonesia's proposed export ban includes, but is not limited to, nickel, bauxite, copper, zinc, gold, silver, manganese and iron ore. The mining sector accounts for about 11 percent of Indonesia's gross domestic product (GDP), but much of this comes from the export of raw metal ores. If Indonesia were to process the metals domestically, their contribution to the country's GDP could increase substantially.
In addition, the export ban could help Indonesia develop energy sources in many of its distant regions. Presently more than 30 percent of Indonesia's population lacks access to electricity. The processing facilities that would need to be built in the country would require a major upgrade in Indonesia's power-generation capability.
The government has looked to renewable energy sources, such as hydropower and geothermal energy, to remedy this issue. Indonesia is particularly well-suited to utilize geothermal power; it is the third-largest producer of geothermal power despite the fact that it still generates more than 85 percent of its electricity with fossil fuels. Geothermal sources currently make up 1.9 percent of Indonesia's total power generation, but the government hopes to increase that figure to 5 percent by 2025. The government estimates that the country's geothermal capacity is as high as 28 gigawatts, which is equal to the amount of Indonesia's current power-generation capacity.
The development of the Indonesian geothermal industry has been largely hindered by a lack of investor interest. But geothermal and hydropower facilities are essential to the success of Indonesia's plan to domestically refine its metals. The upfront costs of such refining facilities are extremely high, so to be economically viable the cost of the facilities supplying their power cannot be too high. Geothermal and hydropower facilities are cheaper than other forms of electricity generation, making them ideal solutions.
For instance, the first planned alumina plant in Indonesia would cost $450 million and would produce around 300,000 tons per year, which is only about 8.5 percent of China's total yearly output. The estimated cost of geothermal projects in Indonesia ranges from $75 million to $150 million.
Nickel and bauxite are the most significant industries that would be affected by Indonesia's export ban. Most of Indonesia's exports of these metals go to China and Japan. For their part, more than half of China's and Japan's imports of nickel come from Indonesia, and China gets more than 80 percent of its bauxite from the country. Because of this dependence, and because China and Japan have their own problems with the power generation needed for ore processing — China is struggling to meet high electricity demand and Japan has shut down many nuclear power plants since the Fukushima Daiichi disaster — Indonesia may be trying to use them to increase its own market share and electricity capacity.
Chinese and Japanese Dependence
Indonesia produces 16 percent of the world's nickel ore, but only 1 percent of its nickel ore production is refined domestically, making export the only viable option. Considering that China and Japan import more than 50 percent of their nickel ore from Indonesia, a drop in supply would place significant constraints on those countries' stainless steel producers.
The result is that Chinese and Japanese firms have been forced to invest in Indonesia's processing capacity. Chinese companies have signed several deals in Indonesia to develop nickel-smelting facilities, though these are unlikely to be completed in the near future — at least not on a sufficient scale to meet all of the country's processing needs.
In addition to these construction plans, insufficient power generation in some of Indonesia's mining areas will require firms to build or finance area-specific power plants. PT Vale Indonesia, the owner of Indonesia's largest open-pit nickel mine, in Sorowako, is building the 90-megawatt Karebbe hydroelectric power plant project in Sulawesi to further produce and refine nickel matte, which Japan's Sumitomo Corp. then refines in Japan. The Halmahera region of the Maluku Islands, a major hub of nickel mining, could also be a large hub for geothermal power generation. Jakarta hopes that Chinese and Japanese firms will make similar investments, but for processing facilities rather than simply power plants for mining operations.
Indonesia exports the majority of the bauxite it produces, which was around 40 million tons in 2011. Indonesia is in the process of developing its first two alumina plants (bauxite is refined into alumina before being turned into aluminum), but it still would be able to process only up to 3 million metric tons of bauxite annually. The only alumina plant currently in construction — the 300,000-metric ton alumina plant in Kalimantan, a joint venture between SDK Japan and PT Antam — is not slated to begin operations until 2014.
China is highly dependent on Indonesia for its bauxite, importing about 80 percent of its supply from the country. Chinese firms have tendered bids to develop alumina plants in Indonesia, but the subsequent energy costs are significant. As with nickel smelters, alumina plants require the construction of energy inputs in far-off areas of Indonesia.
Electricity-intensive alumina projects in West Kalimantan and the Riau Islands, the main locations for bauxite mining, would benefit from investment in geothermal power. The geothermal potential in West Kalimantan and Riau is significant enough to provide some excess power to the immediate area, and development of geothermal facilities there would help increase investment in the geothermal industry and in Indonesia's alumina industry by showing investors that such projects are viable.
Prospects for Success
Indonesia has successfully conducted a similar raw ore ban in the past. In 2002, the government banned the export of unprocessed tin, allowing it to develop its unwrought tin industry and turn processed tin into one of the country's largest export products in terms of value. As a result of the ban, there has been increased investment in the islands of Bangka and Belitung — home to the world's largest tin smelter and the heart of Indonesia's tin industry — including the possible establishment of Indonesia's first nuclear power plant. However, the tin export ban was different because Indonesia had a larger market share than it does with, for instance, nickel and bauxite.
Indonesia may make additional investments in its bauxite-refining industry, but it will encounter difficulties because the major market for its bauxite exports, China, has substantially decreased its imports of the refined product alumina. China's alumina output is projected to reach 3.5 million tons in 2012, while prices are expected to fall further amid growing supply and competition between domestic alumina refiners. Chinese imports of alumina fell by 57 percent in 2011, so Indonesia will have to look elsewhere should it seek to capture a large portion of the alumina market. (However, in the first quarter of 2012, Chinese imports of alumina rose 56 percent, in large part due to concerns over supply shortages should Indonesia ban bauxite exports.)
Chinese and Japanese firms have been pressured to increase their investments in the country to maintain their metals industries, which will also require investments in local power generation. Since geothermal and hydropower facilities provide low-cost energy sources near the major mining areas, there is a strong potential for Indonesia to develop nickel and bauxite smelters and processing capabilities. There is still time for the plan to change, but it appears Jakarta has made the choice to ban certain metal exports to move up the value chain in its processing industry and to develop its energy industry. But the time frame for power plant construction and smelter development will make Indonesia's plan difficult to execute.