By Fergus Jensen and Melanie Burton
JAKARTA/SYDNEY, Jan 27 (Reuters) - Indonesia's ban on exports of key mineral ores - unless they are processed in the country - risks backfiring as weaker commodity prices mean it is not cost-effective to invest in expensive smelters and refineries.
The ban, which came into effect on Jan. 12, was unveiled in 2009 as a commodities boom began to froth and Jakarta sought to extract more value from its mineral resources. But metals prices and margins have since fallen, leading to oversupply and less need for building more processing capacity.
Worried about the impact on its current account deficit and a sagging rupiah currency, Jakarta tried to ease the ban last month only to be blocked by parliament. This month, it issued exemptions to allow shipments of copper, zinc, lead, manganese and iron ore concentrate, leaving nickel and bauxite - key ingredients in making steel and aluminium - the main targets.
Companies considering building alumina refineries are moving slowly as they weigh the big investments required amid caution over Indonesia's policy flip-flops.
A 1 million-tonnes-a-year alumina refinery in Indonesia 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 a tonne, said Michael Komesaroff, principal consultant at Urandaline Investments, noting alumina trades now at $325-$350 a tonne.
"It's not economic to construct an (alumina) refinery in Indonesia. The costs are too high, the bauxite deposits are too scattered to supply an in-situ refinery and the sovereign risk in Indonesia for such a capital intensive asset would be too high," he said.
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 aluminium output.
Indonesia's trade ministry said on Friday that no miners or companies had requested approval for concentrate or ore exports since Jan. 12 and no concentrate shipments have taken place since then.
SOME WILL, SOME WON'T
The ban will depress local prices, potentially damaging the domestic industry it was designed to help, and have a knock-on effect on reducing Indonesia's foreign exchange earnings. In terms of jobs, smelters are not big employers, and offer only a small return on high investment.
The export ban could cut government revenue by as much as $820 million this year, Indonesia's finance minister has said.
While Indonesia's bauxite industry could be crushed, some nickel miners, starved of sales revenue as ore piles up and can not be shipped, are speeding up plans to build smelters.
But here, too, the cost calculations don't look promising.
"It's very tough," said Maman Resman, spokesman for nickel miner PT Bintang Delapan, one of the few miners to have started building a smelter. "We're quite worried because this is connected to a very large work programme."
The company is cutting costs and hopes to halve the timeline for its $1.2 billion, 300,000-tonnes-per-year ferronickel smelter project in Sulawesi, one of Indonesia's main nickel producing regions. The project, which includes its own power plant and infrastructure, is feasible so long as the price of nickel is above $15,000 per tonne, the company said, adding it expects nickel prices to increase.
Benchmark LME nickel was at $14,292 a tonne on Friday, a nudge above recent 4-year lows. LME nickel prices are seen rising 13 percent over the next 12 months, Goldman Sachs said in a note dated Jan. 21. It sees prices averaging at $14,800 a tonne this year and $15,125 next year.
Indonesia has issued business permits for 28 smelter projects, according to the Investment Coordinating Board, but only three are expected to come online this year. Various planned projects have not got off the ground. The $5.5 billion Weda Bay project in Halmaherah, which dates back to the 1990s, is at least five years from completion, analysts say, because of the high risk factors and relatively low nickel price.
But there is some hope. Indonesia is the largest exporter of nickel ore to China's steel industry. Chinese nickel pig iron producers turn Indonesian ore into a cheaper feed than refined nickel for stainless steel. Several Chinese firms are speeding up plans to build smelters in Indonesia to process nickel ore, which has a higher metal content than ore from other nearby countries such as the Philippines, making it cheaper to process.
"Unlike copper, where mines capture more than 90 of the value of the concentrate, in selling nickel ore, the mine captures only 15-20 percent of the value - so there's a much more compelling argument in terms of the viability of making a return on investment from constructing a nickel smelter," said Andrew Mitchell, a consultant at Wood Mackenzie.
But for bauxite, buyers, including the Chinese, may simply shop elsewhere.
Unlike minerals such as copper, which is relatively costly and complex to mine, bauxite is plentiful, with deposits close to the surface making it comparatively cheap and easy to access.
"The Chinese are looking very seriously at mining bauxite in Guinea, and that's a better economic deal for them than building an alumina refinery in Indonesia," said Urandaline's Komesaroff.
China's Bosai Minerals exited a plan to build a 2 million-tonnes-a-year complex in Indonesia in 2012, focusing instead on developing two existing bauxite mines in Guyana and Ghana.
Besides the cost of building smelters and refineries, there are big add-on costs for power stations, ports and roads. And, with revenue from ore exports drying up, it will be tough to attract investors for new facilities, warned Agus Suhartono, CEO of Singapore's Ibris Nickel, which halted its Indonesian operations on Jan. 7 pending clarity on the ban.
New smelting and refining investment "in the market circumstances likely to prevail until at least 2020, have poor commercial prospects," USAID, a U.S. foreign aid agency, said in a report last April, noting companies would likely need to take on debt financing for maybe 50-70 percent of the project cost.
"The difficulty the industry is going to have is access to capital," said analyst Matt Fusarelli of consultancy AME Group.
"You're going to have to be pretty strong in your resolve to put half a billion dollars into Indonesia in the current environment."