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.
|e/f= BMI estimate/forecast. Source: BMI Calculation/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
We expect the Indonesian government will push ahead with its February 2016 proposal to revise the country's mineral ore export ban by September 2016 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. In February 2016, major private tin miner and smelter, PT Refined Bangka Tin announced plans to end all its tin operations after failing to meet 'environmentally friendly' requirements. In the same month the Indonesian government started further auditing of 33 tin smelters in Bangka Belitung to assess whether to allow their tin exports. 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 by September 2016 in order to improve economic growth.
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