Indonesia needs to process mining exports for added value

The Jakarta Post ,  Jakarta   |  Wed, 07/18/2007 11:22 AM  |  Business

Achmad Syafriel, Research Analyst

Indonesia needs to transform itself from a raw commodities exporter into a value-added commodities exporter.

Two weeks ago we witnessed the debut in theaters of a long-awaited box office movie based on a childhood-era action comic about good and evil robots.

It may have been a coincidence, but several weeks earlier a number of local TV channels had carried stories about a robot-building competition involving Indonesian students, with the robots being designed to perform specific tasks, such as extinguishing fires, etc.

The latter may be science and the former fiction. But regardless of that, all robots have something in common: they are made from metals, e.g., iron, nickel or aluminum.

Although Indonesia doesn't produce robots, it has plenty of metals to start with. Sitting astride a highly active volcanic region, Indonesia has vast reserves of minerals. It is not surprising that Indonesia in the past was known as the sapphire necklace of the equator, referring to the vast natural resources spread across the archipelago.

Apart from agricultural products, such as rice, crude palm oil (CPO), rubber, cocoa, coffee and tea, hard commodities, such as oil, gas and coal -- as well as much-in-demand metals such as tin, gold, copper, nickel, iron sand and bauxite -- are now key export commodities.

But getting these resources out of the ground is an art in its own right. Mining requires huge investment and is fraught with risks.

While geological data may show potential reserves in certain areas, mining companies still need to perform many expensive tests to gauge the technical and economic feasibility of exploration and exploitation, the costs of which have to be borne by the mining firms.

Due to the huge size of the investments required, foreign firms have been encouraged to invest in Indonesia's mining sector, in tandem with local mining companies.

These companies have signed many agreements with the government to engage in exploration and production under various profit-sharing schemes and over differing time periods.

Mining products are now key exports to countries such as Japan, China, and the U.S., and thus contribute substantially to government revenues. Unfortunately, however, most of Indonesia's mining exports are still exported in raw form.

Many foreign companies that invest in the Indonesian mining sector only dig out the ores and export them in unprocessed form. This represents an opportunity loss to Indonesia as the prices of raw and processed commodities can differ substantially.

Let us take nickel and bauxite as an illustration.

Saprolite and limonite are nickel ores. Saprolite is classified as high-grade nickel ore while limonite is low-grade nickel ore. They were sold at prices of US$55/wmt (wet metric tons) and $31/wmt, respectively, on average last year.

On the other hand, ferronickel, which is a processed product from nickel smelters that use 80 wmt of saprolite for every 1 ton of ferronickel, sold at up to $10/lbs, or more than $22,000/ton.

This means that the price of 1 ton of processed-nickel is equivalent to 400 times that of nickel ore!

Another example is bauxite. Bauxite is sold for approximately $11-12/wmt. However, after being processed into alumina (smelter-grade alumina), it can fetch a price of $360/ton. This means that the price of alumina is up to 30 times that of bauxite.

Therefore, Indonesia could earn much higher revenues if raw commodities were processed into higher value-added ones before being exported. In this regard, Indonesia needs to intensify the transfer of knowledge in the mining sector.

However, technological transfer has always been easier said than done. For developed countries, technology is their key competitive advantage.

Domestic mining companies realize that technological transfer requirements can be obstacles to the negotiation of joint venture projects with prospective foreign partners.

However, now is the time for Indonesia to make the most of the rising global demand for energy. With strong economic growth in China and India, energy is in high demand. Indonesia could use this situation to leverage its bargaining power.

In the new mining bill, which is still being deliberated in the House of Representatives, the government plans to ultimately prohibit the export of unprocessed ores.

Indonesia should go further and make technological transfer a requirement for new mining sector contracts.

For Indonesia to transform itself into an exporter of hi-tech robots at this point seems far-fetched. In the meantime, why not start by making the most of our raw-material exports?

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