BMI View: Indonesia's mineral production growth will remain slow on the back of heightened environmental protection, slowdown in the Chinese economy and continued mineral price weakness. The impending ban moderation on the export of mineral ores will provide some respite to production, especially in the case of bauxite , although uncertainty on the issue will rumble on.
|e/f = BMI estimate/forecast. Source: BMI, UN Data|
|Mining Industry Value, USDbn||103.40||90.90||77.40||59.80||53.50||54.30||60.30||65.20||70.00|
|Mining Industry Value, USDbn, % y-o-y||3.15||-12.12||-14.82||-22.79||-10.49||1.50||11.09||8.04||7.46|
Latest Developments & Structural Trends
Under current regulations, as of September 2016:
Minerals like copper, iron ore, lead and zinc are still allowed to be exported temporarily up to January 2017, to allow companies time to develop their smelters.
Bauxite and nickel ores, however, were not given this temporary allowance, and exports have been banned since January 2014.
Impact on exports in 2017 under current regulations:
Iron ore, copper ore, zinc and lead ore exports will be close to nil, as major smelter construction will not be completed by 2017, which means Indonesia will lose a large positive contributor to its GDP. As an example, major copper producers Freeport McMoran and Newmont Nusa Tenggara have yet to complete 15% of the construction of their respective smelters.
Nickel pig iron (NPI) smelters will come online and NPI exports will surge, along with nickel ore production.
Bauxite production will recover slowly with the completion of two smelters in 2015 and 2016, but there will be no rebound to previous highs. Alumina exports will begin with production from the two smelters, China Hongqiao Group and PT Indonesia Chemical Alumina, coming online.
The outlook for Indonesia's export policy in 2017 is uncertain, as the government has made no official announcement since it mentioned in February 2016 that it may revise the export ban by the end of the year. We have therefore laid out some scenarios regarding Indonesia's export policy:
Core scenario (55% probability): Indonesia will partly moderate its ban by allowing some nickel ore and bauxite exports, or delay the implementation for minerals currently holding temporary export permits, such as copper ore, iron ore, lead ore and zinc ore. This could be done towards the end of 2016 or in January 2017.
Maintenance of the status quo (30% probability): This means that the current regulations will remain in place and a full ban on all mineral ore exports, including the temporarily allowed minerals, will be implemented in January 2017 (see above for the impact on exports in 2017 under current regulations).
Complete relaxation (15% probability): This means that the mineral ore export ban will be revoked, and exports of all minerals will be allowed without any quota. This would not fare well for investors who have already invested in smelter construction in the country. Additionally, this poses upside risks to our production forecasts - particularly exports of nickel and bauxite, the two minerals without any temporary export allowance at present. As a result, this poses downside risks to prices of nickel and bauxite in 2017.
We expect the Indonesian government will push ahead with its February 2016 proposal to revise the country's mineral ore export ban by January 2017 as expected investment in the downstream sector has not materialised. The bauxite sector will benefit most from the relaxation of the ban, as the sector registered poor smelter construction and the greatest loss in revenues as a result of the ban. We expect our current production forecasts to face upside risks due to the impending ban moderation.
We forecast bauxite production growth in Indonesia to register an annual average of 148.2% during 2016-2020, mainly because of acceleration in production in 2016 of 600% due to China Hongqiao Group Limited's smelter facility coming online. Hongqiao will initially produce one million tonnes per annum of aluminium, doubling capacity by 2017. One tonne of aluminium requires approximately five tonnes of bauxite to produce. Contrary to numerous smelter project proposals in 2014 and our past expectations on high smelter investment from China, smelter investment for bauxite has been stagnant as a result of low prices and lack of funding. In March 2016 Hongqiao started trial runs in its new alumina smelter in Indonesia, adding to the only other smelter in the country, PT Indonesia Chemical Alumina, a subsidiary of diversified local miner PT Antam.
We expect Indonesia's coal production to fall by 15.0% to 314 million tonnes in 2016, followed by subdued growth henceforth to 2020, registering an average annual growth of 3.0% per annum during 2016-2020. Over the long term, despite the one time fall in domestic production due to the crackdown on illegal mining in 2015, we believe output will be supported by strong demand from a domestic pipeline of coal-fired power plants. Although emerging economies like the Philippines will continue to rely on Indonesian coal for power generation, a spate of piracy incidents in the last few months attacking Indonesian ships will undermine shipments in the upcoming quarters. Additionally, India's ramping up of domestic coal production will eventually reduce the country's reliance on Indonesian coal imports in the coming years.
We forecast Indonesia's copper mine production to grow at a steady pace, registering annual average growth of 10.7% during 2016-2020, compared to a decline of 17.8% during 2011-2015. We expect copper production to grow gradually in 2016 due to the resumption of copper concentrate exports from the major miners. In July 2014, the Indonesian Finance Ministry revised its rulings on taxation, with tax on copper concentrate exports being reduced from 20.0-25.0% to 7.5%. This export tax will decline to 5.0% when the progress on smelter development by mining firms exceeds 7.5%, and finally to 0.0% when smelter construction progress exceeds 30%. Currently, an outright ban on copper concentrate will come into place in 2017.
We forecast Indonesia's nickel ore production to grow by 15.0% in 2016 and by an annual average of 10.6% over the subsequent five years to 279 thousand tonnes (kt). The country's nickel production growth will be supported by a few nickel pig iron smelters coming online, including Tsingshan Sulawesi's nickel pig iron phase 2 project. Although numerous smelter projects had been planned since 2014, a lack of funding and low metal prices have resulted in a slow materialisation of smelter construction. The dwindling of Chinese high-grade ore stocks and the consolidation of China's domestic nickel industry coupled with the high demand for nickel will tighten the global market and provide support to nickel prices. Indonesia is set to take its place as one of the top exporters of nickel pig iron to China over the coming years.
We forecast that Indonesia's tin mining production will slow in the coming years due to a clampdown on miners and restrictions on offshore mining. We forecast Indonesia's tin mine production to register an annual average growth of 1.9% during 2016-2020, compared to 10.1% during 2011-2015. Tin production will be constrained in 2016 as registered tin exporters struggle to obtain the 'Clean and Clear' certification from the government which is a requirement in order to export tin from November 1 2015. Since January 2016, the country's largest tin producer, PT Timah Tbk, stopped production in Kelabat Bay after orders from the local governor in Bangka to halt offshore mining following complaints from fishermen and NGOs about environmental damage caused by dredging.
Without the relaxation of the ban moderation, the mining industry will not recover and continue to contribute to the country's economic slowdown. In 2015, Indonesian mining industry value shrank by 22.8% and we forecast a further 10.5% decline in 2016. Without ban relaxation we forecast the mining sector's contribution to GDP to decline to 4.6% by 2020, down from 11% in 2013 before the ban. Additionally, Indonesia's real export growth dipped to 4.6% in 2015 compared to 22.4% in 2013 before the ban. These poor macroeconomic indicators will ensure the Indonesian government moderates the ban on mineral ore exports as it has planned to do in order to improve economic growth.
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