Indonesia to Soon Ban Bauxite Exports

But environmental damage, Chinese domination, worker dissatisfaction could make it a poisoned chalice

In a replay of its 2020 ban on nickel exports, the Indonesian government intends to impose a similar regulation on bauxite starting in June as part of a sweeping plan to reclaim control over the country’s abundant natural resources. The plan is an effort to encourage the domestic bauxite processing and refining industry. If it is enforced, state revenues from bauxite, which is essential for the production of aluminum, are forecast to rise sharply. Copper, tin, and gold are intended to be next in the face of doubts whether the country is ready to implement the policy and with likely resistance from the importing countries.

Nonetheless, President Joko Widodo, widely known as Jokowi, has decreed that after decades of exploitation by multinationals, exports of raw materials including bauxite will continue to shrink and downstream production will continue to increase. The government wants to realize natural resource sovereignty and increase domestic added value to encourage enhanced job opportunities and fatten foreign exchange. The bauxite export ban, he said, was also carried out because of the benefits of the nickel export ban, which Indonesia claims is very profitable.

Processed bauxite, refined into alumina, is worth eight times as much as raw ore. If Indonesia sells this processed bauxite product or at least in the form of alumina, it is estimated that state revenues would increase threefold, from Rp21 trillion to Rp62 trillion. Bauxite ore reserves are estimated at 3.2 billion tonnes. 2021 production is estimated 25.8 million tonnes, of which 2.2 million tonnes were absorbed by domestic smelters, with the remaining 23.2 million exported abroad. Based on data from the Ministry of Energy and Mineral Resources (ESDM) as of 2021, there are only three operating smelters with a total input capacity of 4.56 million tonnes of bauxite ore.

The government's policy of banning the export of bauxite ore reinforces the provisions in a 2020 law concerning mineral and coal mining, which requires downstream development through the construction of domestic processing and refining facilities – smelters. Thus, the government will oblige mining companies to process their raw minerals domestically before exporting them, so that Indonesia gets greater added value. The downstream process is to continue to be developed into commodities other than nickel and bauxite, such as copper, tin, and gold although experts argue that the bauxite processing and refining industry, for one, is unprepared.

The government has in recent years banned the export of raw natural resources such coal and palm oil in addition to nickel, which has been given credit for saving the economy during the Covid-19 coronavirus crisis. During the global crisis due to the pandemic and the Russia-Ukraine war, Indonesia's trade balance has actually been in surplus, with the value of exports recorded as 29 times greater than the value of imports.

However, the ban has caused protests from other countries. In the nickel case, for example, the European Union sued, with Indonesia losing the case. The country is currently appealing the decision while continuing to build nickel smelters. Also, rather than an indigenous industry it has been largely taken over by Chinese mainland interests. A collaborative study between Auriga Nusantara and the Corruption Eradication Commission (KPK) found that nine of 11 smelters in Morowali, one of the main nickel-producing areas, are owned by Chinese interests. Thousands of Chinese workers were also brought to Indonesia to work in these smelters. It is feared that the clashes that occurred at PT GNI between foreign workers from China and local workers would spread to other locations.

Nonetheless, the ban on bauxite exports is expected to go ahead, and is designed to force entrepreneurs to build downstream facilities and encourage investors to come in, as happened with the nickel policy although they didn’t count on domination by the overseas Chinese. However, the Association of Indonesian Bauxite and Iron Ore Businesses (APB3I) is concerned that tens of millions of tonnes of bauxite production won’t be absorbed by the industry if exports are prohibited because smelter construction has not shown significant progress. Acting Daily Chairman of APB3I Ronald Sulistyanto said the stagnation in the development of smelters has been caused by lack of funding from banks and investors. The investment requirement is very large, reaching US$1.2 billion per smelter, with attracting investment difficult considering the uncertain world economic situation due to the Russia-Ukraine war, the impact of the Covid-19 pandemic, and the specter of a looming economic downturn.

Sulistyanto said it would take at least the next four years to be able to absorb all of the domestic bauxite production. The Ministry of Energy and Mineral Resources reported that seven smelter construction projects have experienced serious problems, with construction development below 50 percent. The ministry together and related business actors are currently looking for the right form of smelter construction to reduce the very high investment needs, including possibly forming a consortium.

The Nickel Export Ban

The government claims that the nickel export policy has wrought enormous benefits. Before the export ban, trade value from the sale of nickel ore was only around US$1.1 billion. However, it jumped 19 times to US$20.9 billion after the export ban took effect and domestic processing began. Nickel is the prima donna as the energy demand for electric vehicles increases. As the largest nickel producing country—the potential reserve is estimated at 11.7 billion tonnes with 4.5 billion tonnes that can be mined immediately—Indonesia should benefit greatly. Nickel as a component of non-oil and gas exports has indeed supported the positive trade balance in the last two years which prevented the rupiah from falling against the US dollar.

The claim was justified by the Indonesian Nickel Miners Association (APNI). The success of the policy is evidenced by the many mining product processing factories that have sprung up. In 2020 since the ban was enforced, there are only 13 nickel smelters operating in the country, according to data from the ESDM ministry. Based on APNI data, it is estimated that there will be 43 processing plants by end-2023, and it is expected to continue to increase to 136 smelters by 2025. Entrepreneurs are optimistic that this policy will help Indonesia face the threat of the predicted global recession, and lead Indonesia to prosperity.

However, the government's nickel-related policies have run into heavy weather. Workers demonstrated recently at the PT Gunbaster Nickel Industry (PT GNI) nickel smelter in North Morowali, resulting in the deaths of two people, workers from China and Indonesia. PT GNI was accused of alleged violations of labor regulations including the absence of company regulations, imposing contractual status for permanent jobs, deducting wages, violating regulations on Occupational Safety and Health, and unilateral termination of employment.

There is also the suspicion that many companies are mining illegally. An investigation by Tempo magazine found dozens of mining companies extracting nickel in Sulawesi Island without a management permit from the Ministry of Environment and Forestry (KLHK). Although they claim to be mining in an area that does not need a permit, satellite imagery shows their mining location is in a protected forest area and a limited production forest, which cannot be mined without a permit.

During the past three years, an estimated 5,000 hectares of forest have been illegally cleared, resulting in environmental damage and massive deforestation. The smelting process creates a caustic red mud with high salinity and elevated arsenic and chromium concentrations that must be stored behind high impoundments that historically have not been particularly effective in Indonesia. Internationally, only about 2-3 percent of bauxite residuals are reused in a productive way, meaning the tailings are likely to be around for a long time with the attendant danger that the impoundments will be breached. Domesticated bauxite production may have its unpleasant side.