BMI View: Indonesia's mineral production growth will slow on the back of the country's ban on mineral exports and continued mineral price weakness.
|e/f= BMI estimate/forecast. Source= UN Data, BMI|
|Mining Industry Value, USDbn||79.27||66.43||63.25||67.45||75.41||55.40|
|Mining Industry Value, USDbn, % y-o-y||-13.85||-16.20||-4.79||6.64||11.80||-26.54|
Latest Developments & Structural Trends
With the boom years in commodity prices behind us, we believe more miners in Indonesia will be forced to put the brakes on investment over the coming quarters. In January 2014, the government implemented the ban on unprocessed minerals, in order to stimulate smelter construction and increase mineral export value.
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 with just one local smelter owned by Inalum completed in 2014 and all other projects halted to date. This will lead to further production cuts by bauxite miners in the near term. As such, we have revised down our forecasts as we expect the majority of new smelter projects will not materialise due to both low bauxite prices and the mineral ore export ban staying in place over the coming quarters. We have revised down our average annual bauxite production growth forecast for Indonesia down from 550% to 40.0%, 58.0% to -4.0% and 20.0% to -4.0% for 2015, 2016 and 2017, respectively.
We have revised down our previously positive production forecast and now expect Indonesia's coal production to fall by 20.0% to 370 million tonnes in 2015, followed by subdued growth at an average clip of 1.7% per annum over 2016-2019. In January 2015, the Indonesian Ministry of Energy and Mineral Resources mentioned that the country is aiming to produce 425 tonnes of coal with 333mn tonnes earmarked for exports. 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 growth from a domestic pipeline of coal-fired power plants and continued import demand from Asia.
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 progress exceeds 30%. Currently, an outright ban on copper concentrate will come into place in 2017.
We forecast that Indonesia's tin mining production will shrink in the coming years due to a clampdown on miners and restrictions on offshore mining. We forecast Indonesia's tin mine production to decrease 10.0% in 2015 followed by an average annual growth of 3.6% over 2016-2019. Tin production will be constrained in 2016 as only 3 out of 22 registered tin exporters could achieve the 'Clean and Clear' certification from the government which is a requirement in order to export tin from November 1, 2015
In the longer term, moderation on the ban still remains a possibility if Indonesia's measures fail to attract enough foreign direct investment to offset the costs it incurs. According to the Indonesian Mining Association, building smelters is economically unviable for minerals such as copper, zinc and lead due to slim refining margins and the size of Indonesia's reserves. Chronic power shortages and poor infrastructure support in Indonesia also remain significant hurdles to the development of a downstream mineral products industry over the medium term. Given the importance of the mining sector, which accounts for around 11% of Indonesia's GDP and 16.0% of all foreign direct investment flows, the government will be carefully monitoring the situation and might adjust its policy in case growth slows down further.
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