(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Feb 3 (Reuters) - Indonesian minerals policy is rarely a straightforward affair and so it proved again in the run-up to the Jan. 12 ban on exports of unprocessed ores.
There was plenty of last-minute drama, particularly concerning the treatment of copper concentrates. These were first unexpectedly included in the ban and then granted an eleventh-hour presidential exemption, but with an equally unexpected caveat of rising export taxes.
And there will surely be more twists and turns in the story in the weeks and months ahead.
Both of the major copper producers operating in the country, Freeport McMoRan and Newmont Mining, are challenging the government's right to change existing contracts of work governing their operations at Grasberg and Batu Hijau respectively.
A local mining association, meanwhile, has wasted no time in filing a legal challenge to the ban.
The really big surprise, though, is just how total the ban is. Right up until the Jan. 12 deadline the consensus view was that the Indonesian authorities would fudge the issue, most likely in the form of wide-ranging exemptions to companies that had displayed a minimum level of commitment to building processing plants.
Not so, however. Such exemptions may come with time but for now this ban bites as well as barks.
One of the expected restraints on Indonesian policy-makers was the likely flow-through impact from the ban on a local mining industry that is a major employer and a major revenue generator for the country.
There was no shortage of dire warnings about mass lay-offs and mine closures if the ban went ahead. Given the somewhat parlous state of the Indonesian economy, there was widespread scepticism that the government would really want to kill off large parts of its resources sector.
Yet not only did the authorities go ahead anyway, but it is becoming clear that they are fully prepared to countenance the short-term pain for the longer-term gain of forcing the mining sector down the value-added processing path.
The proof comes in the form of the mines ministry's forecasts for minerals production this year.
Output of both bauxite and nickel ore, key export streams to processing industries in China, are expected to collapse.
Nickel ore output is seen slumping from 60 million tonnes in 2013 to just 3.5 million tonnes this year. Bauxite production is expected to contract even more dramatically from 56 million tonnes to just one million tonnes.
Copper production is expected to rise from 450,000 tonnes to 640,000 tonnes, although ironically it is the copper market that is experiencing the most immediate impact from the ban.
Both Freeport and Newmont thought their existing contracts of work shielded them from future changes to Indonesian minerals policy.
Now, however, they face the prospect of rising export taxes on concentrate shipments and a complete ban from 2017.
Both have said they intend to engage with the authorities with a view to finding, to quote Freeport Chief Executive Richard Adkerson, a "mutually agreeable resolution".
But in the interim both have suspended concentrate shipments and, unless a deal can be reached pretty quickly, both will have to start trimming output rates.
Analysts at Barclays Capital estimate that the shipping cessation could already have cost the market 45,000 tonnes in supply in January. ("Metal Markets Outlook," Jan. 31).
Now, it's not as if the copper market is desperately short of raw materials. Concentrates availability is as good as it's been in many years thanks to a wave of supply arising from a combination of expansions and new mines.
But it's noticeable that treatment and refining terms, the fees paid to smelters for converting concentrates into refined metal, have come off the boil in the last couple of weeks, currently quoted at around $100 per tonne and 10 cents per lb.
There are no doubt other factors at work in the current concentrates market, such as the absence of Chinese buyers during the Lunar Year holidays and the return of the Philippines PASAR smelter from an outage, but somewhere in the mix is the halt to Indonesian export flows.
Quite evidently, the Indonesian component of the copper raw materials market will only gain in significance with time.
Seven Chinese companies are planning to build nickel ore processing plants in Indonesia, according to Xu Aidong, chief analyst at state research house Antaike.
Which of course is precisely the point of the ban, lifting the value of mineral flows through beneficiation.
But, contrary to expectations, there was no preemptive exemption on the shipment of ore for those companies that have already begun work on processing plants.
The ban right now is total and, judging by those official production forecasts for this year, the mines ministry is not expecting much to change.
The impact on the London Metal Exchange nickel price might be said to have already been and gone. Three-month metal surged from under $13,500 per tonne to almost $15,000 when the market realised the full extent of the ban. The price has since given back most of those gains, trading at around $13,900 per tonne this morning.
And it might be argued that the ban is actually short-term negative for the nickel price because it will discourage other producers from curbing output in a structurally over-supplied market.
It may even encourage new supply, judging by Poseidon Nickel's plans to return to a long-dormant deposit in Australia.
Moreover, everyone knows that Chinese importers had been stocking up ahead of the January deadline, meaning there will be no immediate hit on run-rates in the nickel pig iron (NPI) sector, which is highly dependent on Indonesian ore supplies.
However, there is a secondary, less obvious price impact now taking shape.
The price of that stockpiled nickel ore in China AM-18C-NORE has already started rising in what is probably the first sign of the potential for cost inflation in the NPI sector.
The only market not to have yet blinked at the Indonesian ban is alumina, the intermediate product sitting between bauxite and aluminium in the production chain.
Chinese alumina refineries have built up an even more impressive cushion against the disruption to Indonesian supplies than their nickel counterparts.
Moreover, other sources of bauxite are available, most notably Australia, where availability will be freed up by the pending closure of Rio Tinto's Gove alumina refinery.
That said, there is an argument that Chinese buyers will eventually have to tap Atlantic Basin supply to fully offset the loss of Indonesian exports. That has cost implications for bauxite, alumina and ultimately aluminium.
Particularly since there does not appear to be much rush to build alumina refineries in Indonesia, a much higher investment outlay than a nickel processing plant.
There is the potential for the ban to backfire in the bauxite-alumina market, killing off the mining sector while failing to stimulate investment in processing capacity.
But the key takeaway at this stage is that Indonesia is evidently prepared to run that risk. (Editing by William Hardy)