Change can be difficult, especially when it involves compromising short-term concerns for long-term strategic necessities. The Indonesian government is learning this as it attempts to move the country's economy up the value chain amidst internal institutional constraints and complex external conditions. On the one hand, Jakarta recognizes the paramount importance of shifting from an economic model heavily reliant on raw materials exports to one in which Indonesia refines its own metals, minerals and ores, both for export and more importantly for domestic use in manufacturing industries. On the other hand, building the infrastructure necessary to make that leap takes time, capital, corporate confidence and political willpower — all things that are difficult to muster for a country facing high inflation, a mounting current account deficit and upcoming national elections.
Negotiations to delay a long-awaited ban on raw mineral and metals exports highlight the nature of Indonesia's current political and economic quagmire. The ban, passed by the Indonesian Parliament in January 2009, was hailed at the time as a hallmark of President Susilo Bambang Yudhoyono's economic policy and a sign that Indonesia might fulfill its promise as a key successor to China's low-end manufacturing empire. Now, with inflation hovering around 9 percent annually and a current account deficit equal to 3.8 percent of gross domestic product as of September 2013 (down slightly from 4.4 percent in May 2013), Jakarta looks poised to delay large portions of the ban until 2017 in a bid to keep metals exports alive and export-related revenues flowing.
The Ban's Terms and Potential Market Effects
The original ban targeted a wide variety of metals and minerals. By far the most significant were bauxite, nickel and copper; Indonesia is the world's top exporter of the first two and a moderately important regional supplier of the third. Most of the other metals and minerals included in the ban made up only a small fraction of Indonesia's total raw materials export revenues; likewise, Indonesia is not a critical global supplier of ores beyond bauxite and nickel. The ban, if implemented in full, would therefore have varying effects. For copper and other more minor ores, the ban likely would put upward pressure on prices, both for the ores themselves and for downstream products (in 2012, Indonesia accounted for 5 percent of the global copper ore export market and about 6 percent of China's copper ore imports), but would not necessarily turn markets upside down.
Bauxite (an aluminum ore) and nickel are another matter. In 2012, Indonesia supplied 58 percent of the world's nickel import demand by volume, nearly double the amount from the next largest supplier, the Philippines. Likewise, Indonesia accounted for 48 percent of global aluminum ore exports by tonnage, almost three times the amount from Australia, the next largest supplier. Just as significant for the global economy and downstream industries, however, is Indonesia's dominance of the Chinese bauxite and nickel ore import markets. In the first nine months of 2013, China sourced 66 percent of its aluminum ore from Indonesia (up from 64 percent in 2012) and 57 percent of its bauxite ore (on par with 2012 levels). In recent months, in the run-up to the export ban's imposition, Chinese traders have been stockpiling both commodities heavily. Reportedly, China now holds 40 million tons of nickel ore reserves, equivalent to 64 percent of annual nickel ore imports as of 2012. Chinese imports of bauxite also have skyrocketed in recent months, boasting annual growth rates of 370 percent in some months of 2013.
Adjusting the Ban
On Jan. 8, according to a report in the Jakarta Post on Jan. 9, Indonesia's Energy and Mineral Resources Minister Jero Wacik announced that the government had agreed to amend the 2009 export ban to allow companies that exhibit a "strong commitment to building smelters" to continue exporting raw mineral products until 2017, when a full ban would go into effect. The government also said that it would lower the requirements as to what constituted refined minerals by reducing the minimum required purity rate for some ores, though it is unclear whether this second adjustment would apply beyond 2017.
Notably, reports in the Jakarta Post and elsewhere suggest that the relaxed regulations would apply primarily to Indonesian copper ore exports, of which just two companies — Freeport Indonesia and Newmont Nusa Tenggara — make up 97 percent (both companies would also be allowed to continue exports of zinc, lead, iron and manganese). It did not specify whether or to what extent the delay and relaxation of the ban would apply to bauxite and nickel exports. On Jan. 9, the Jakarta Post and Reuters reported that the ban on both ores would remain in place, citing contradictory notes from government ministers alleging that Indonesia already possesses "ample domestic smelters" and that the ban could still cause Indonesian nickel production to fall 78 percent and bauxite output to drop 97 percent in 2014.
The move to delay the ban on metals and minerals exports highlights Indonesia's ongoing struggles to overcome the legacy of 10 years of political decentralization in the wake of former President Suharto's fall in 1998. At the time, the devolution of power from Jakarta to the regions was politically necessary and helped maintain overall contiguity of the Indonesian archipelago in the face of significant internal divisions. Now, however, as Indonesia seeks to build a more nationally integrated and advanced economy, its central leaders are constrained by regional, local and individual corporate interests that seek to retain the status quo. In the case of the metals export ban, these interests want to continue exporting raw materials rather than invest in expensive refining infrastructure that entails large up-front costs and regulatory uncertainties for producers that in many cases would prefer to sell directly to the highest foreign bidder. With national policy subject to the transitional period following this year's national elections and no clear picture of whether Yudhoyono's successor will gain enough political strength to steer national policy decisively, Jakarta's ability to overcome these inherited constraints becomes increasingly less certain.