Indonesia facing difficult questions

Bloomberg is reporting that the Indonesia government is reviewing its position on the export of ores and processed ores.

Following the ban on the export of bauxite, the government wanted exporters to invest capital into building alumina refineries and aluminium smelters in the country. Like many countries, Indonesia wanted to capture the value-add inside its own borders. The second part of the law that saw the ban on exporting ore will come into effect in 12 months time. That will be when the ban is extended to cover processed ores, meaning only the prime metal can be exported.

But the drop in primary metal prices over the last 12 months has removed any chance that anyone would cough up the capital to invest in new smelters. In terms of replacing Indonesian bauxite, China quickly discovered Malaysia as a new source, while continuing to develop opportunities in West Africa and elsewhere. And with a surplus of metal inside China, the Chinese will have a hard time seeing any point in building more capacity outside the country.

If Indonesia sticks to its current course of action, it could spell trouble for companies such as Shandong Weiqiao (better known as Hongqiao in the West). That company is in the process of completing its 1mt alumina refinery in Indonesia, but has no plans to build a smelter there. Will Indonesia turn around and tell those who have invested in a processing plant that come 2017 they can no longer export their output? It would be a retrograde step - surely some export earnings are better than none?

The photo at top is one I took when visiting Hongqiao’s alumina refinery in Shandong province recently, showing a stockpile of Malaysian bauxite.