Indonesia is taking control of its mineral resources, incentivizing investment in processing facilities and shifting the international balance of economic power.
On January 1 this year, the Indonesian government imposed a one-month ban on the export of thermal coal to avoid a domestic shortage at a time of high and rising international energy prices.
South Korea, Japan and other coal importing countries were reportedly alarmed.
The domestic price of thermal coal in Indonesia is capped at US$70 per ton. Export prices had been in the $90-$100 range, providing coal companies with a substantial incentive to dodge their legal responsibility to supply the state electric power company with 25% of their output.
The ban caused market prices elsewhere in Asia to jump above $160 per ton, but protected Indonesian consumers from surging global energy prices. It also brought Indonesian coal companies to heel and made it clear that President Joko Widodo, popularly known as Jokowi, would not allow private interests to undermine the national economy.
The ban was partially lifted on January 13 and lifted entirely by the end of the month as planned. With exports accounting for less than a quarter of Indonesia’s coal production, there was no serious threat to importing countries.
Exports of unprocessed minerals including tin, bauxite, copper and gold, on the other hand, will be shut off completely. Exports of nickel ore already have been.
In August 2019, the Indonesian government announced that exports of nickel ore would be banned starting January 1, 2020. This policy was aimed at slowing the depletion of nickel ore reserves while promoting investment in processing facilities within the country.
EU turns to World Trade Organization
Nickel is used to make stainless steel and electric vehicle (EV) batteries.
The ban provoked a reaction from the European Commission, which issued a statement on January 14, 2021:
Today, the EU has requested the establishment of a panel at the World Trade Organization (WTO) to seek the elimination of unlawful export restrictions imposed by Indonesia on raw materials necessary for the production of stainless steel, notably nickel ore and iron ore.
The measures the EU is challenging concern an export ban on nickel ore and domestic processing requirements on nickel ore and iron ore. These measures illegally restrict access for EU steel producers to raw materials needed for stainless steel production.
The EC’s Executive Vice-President and Commissioner for Trade, Valdis Dombrovskis, was then quoted as saying:
Following repeated attempts to resolve this issue directly with Indonesia, the EU is now forced to take action and refer this issue to the WTO. We will always act to protect the rights of our economic operators and safeguard the level playing field for EU producers.
The fact is that no WTO member is permitted to restrict exports of raw materials in this way, imposing illegal restrictions to favor domestic producers. We will take the necessary measures to restore fair conditions for the EU steel industry, as is our right, and as we have undertaken to do as part of our implementation and enforcement agenda.
These are very challenging times for the EU steel sector, which is faced with global overcapacity, illegal subsidization and other trade-restrictive measures, as well as the Covid-19 economic crisis. We will take every possible action to support our steel operators in this difficult environment.
The statement also said: “While the EU industry has reached its lowest level of stainless steel production in 10 years, Indonesia is set to become the second-largest producer in the world after China, fuelled by unfair and illegal advantages like the ones challenged in this dispute.”
The Indonesians, of course, see things differently. At the World Economic Forum in January, Minister of Finance Sri Mulyani Indrawati said: “We are the biggest economy in ASEAN, and you cannot allow this economy to just depend on commodities without value added.”
President talks policy on minerals
The previous month, President Jokowi made a speech at the 7th Anniversary of the Indonesian Solidarity Party in which he laid out the argument for his policy on unprocessed minerals.
He said Indonesia
will make a significant leap if we have the courage to industrialize and downstream our natural resources. For decades, we have always exported our raw material and we must stop it.
We have discontinued nickel exports. Next year we will stop exporting bauxite. After bauxite, we will stop exporting copper. After copper, we will stop exporting tin.
We have added values in our country. We have added values, prices and jobs in our country. However, we must deal with developed countries as the recipients of our exports. They protest against us. The nickel case has been brought to the WTO. It is all right, we will face it.
During the G20 meeting, 16 countries agreed to sign an agreement on global supply chains. After reading the agreement, however, I found that the agreement has something to do with the export of raw materials. I did not sign it and the agreement was revoked. Because we did not sign it, the agreement was revoked.
In other words, Indonesia is big enough to push back.
If we produce finished goods, it will generate 10 times of added values. Nickel, for example, can result in many products. Nickel and copper can become lithium batteries … for electric car batteries … and many other products.
Regarding nickel, we used to have a trade deficit with China. I have learned that in the last three years the value of our exports has increased significantly … Next year it is possible that we will have no trade deficit with China. Instead, we will record a surplus.
That is because of the nickel. If we stop exporting bauxite, exporting copper, exporting tin, exporting gold and other raw material exports, we will get more. I fervently believe that if we do this until 2023 and 2024, our gross domestic product (GDP) in 2030 will triple.
Tripling GDP growth
It is difficult to say if or by when Indonesia’s GDP might triple, but it will almost certainly grow much faster than it would if the value-added from resource processing were not captured.
And the Indonesian economy is already larger than you might think. Indonesia is the world’s largest producer of nickel, the second-largest producer of tin, the third-largest producer of coal, the fifth largest producer of bauxite – used to make aluminum – and an important producer of copper and gold.
In 2021, Indonesia’s nominal GDP was $1.15 trillion, ranking 16th in the world after Mexico, according to the IMF. On a Purchasing Power Parity (PPP) basis, however, it was $3.51 trillion, ranking 7th, behind Germany and Russia, but ahead of Brazil, France and the UK.
To put things in an East Asian context, it was 63% the size of South Korea’s on a nominal basis, but 1.4 times larger on a PPP basis.
Rebounding from Covid, the Indonesian economy is now growing at an annual rate of about 5%.
Rizal Kasli, chairman of the Indonesian Mining Professionals Association, was quoted in Nikkei Asia as saying: “There is a tendency for countries with large natural resources to promote natural resource nationalism, including encouraging domestic down-streaming.
“What the global community needs to understand is that this export ban is in the form of raw materials. They can still get derivative products, and if [foreign countries] want to have a direct contribution, they can jump in with investments that have been opened and facilitated by the government.”
The policy has already borne fruit. Prominent examples include the following:
On February 15, 2022, Japan’s Sumitomo Metal Mining released a new 3-Year Business Plan that says the company is “seeking to make an investment decision on the Pomalaa project (Indonesia) as early as possible. Production launch is planned in the latter half of the 2020s.
“As HPAL project calling for an annual output of 40,000 tons (in nickel), it is aimed at meeting an expected increase in demand for nickel for xEV use.”
On December 15, 2021, German chemical company BASF and French mining and metallurgy company Eramet announced that they “have signed an agreement to jointly assess the development of a state-of-the-art nickel and cobalt hydrometallurgical refining complex.
“Such a development would include a High-Pressure Acid Leaching (HPAL) plant and a Base Metal Refinery (BMR). The HPAL would be located in Weda Bay, Indonesia, while the location of the BMR will be determined during the feasibility study.”
On September 15, 2021, Hyundai Motor and LG Energy Solution of South Korea announced they had started construction of an EV battery factory on the island of Java with an annual capacity of more than 150,000 units for supply to Hyundai and its affiliate Kia.
Production of LG’s nickel-cobalt-manganese-aluminum (NCMA) batteries is scheduled to start in 2024.
The factory is part of a larger project involving Indonesia’s Investment Coordinating Board, Indonesia Battery Corp – a joint venture formed by state-owned mining and energy companies – the LG Group, South Korean steelmaker POSCO and Chinese cobalt producer Huayou.
Hyundai Motor is also building an auto factory nearby.
Huge copper smelter underway
On October 12, 2021, American mining company Freeport McMoRan started construction of what will be one of the world’s biggest copper smelters in East Java.
State-owned mining group Mind Id (Mining Industry Indonesia) owns 51.2% of Freeport Indonesia, which operates the gigantic Grasberg gold and copper mine in Papua. When that majority stake was acquired, Indonesia’s Minister of State-Owned Enterprises, Rini Soemarno, said: “SOEs have a high level of concern, commitment and dedication to improve the welfare of the people of Papua. In line with the functions of SOEs as agents of development.
“SOEs will be the spearhead to drive the downstream process of Indonesia’s mining industry.”
This is in line with the Constitution of Indonesia, Article 33 of which reads:
(1) The economy is organized as a common endeavor based upon the principles of the family system.
(2) Sectors of production which are important for the country and affect the life of the people are under the powers of the State.
(3) The land, the waters and the natural resources within are under the powers of the State and must be used to the greatest benefit of the people.
Last October, the Voice of Indonesia published these remarks by Jokowi on the subject of natural resources: “The gift that God has given us is truly extraordinary, but if we only (become) diggers, then we send them [the resources] outside [the country], they [the importers] build a smelter there, then turn it into semi-finished goods or finished goods, then return to here [and] we buy. This is what little by little, step by step we must begin to eliminate.”
It will be interesting to see how God’s gift to Indonesia, with its Ministry of State-Owned Enterprises, fits with the Biden administration’s “Indo-Pacific economic framework” and America’s often expressed desire to “write the rules” of international commerce.
When it comes to natural resources, Indonesia – which, after all, was one of the founding members of the Non-Aligned Movement – has already created its own framework and written its own rules.
Perhaps, since America is focused on countering China, this will not be an issue. But Indonesia is bringing profound change to the international economic order.
Scott Foster is an analyst with LightStream Research, Tokyo. Follow him on Twitter: @ScottFo83517667.