Zocco sends a tightening signal! How should Chinese enterprises cope with Indonesia's strict control over mineral exports?

Important industrial countries in the world have raised the safety of key mineral supply chains to a strategic level, and the mineral export control policies of resource countries closely related to the supply chain have become the focus of the market. Indonesia, which has rich mineral resources such as nickel ore and bauxite, has repeatedly issued bans to restrict the export of minerals. Recently, President Joko of Indonesia issued another signal to reduce the export of mineral resources. The Nikkei Asia reported on the 7th that Indonesian President Joko said at an investment forum in early February that he would further implement the export ban on tin, gold and other metals. In December last year, Zocco announced that he would ban the export of bauxite again from June this year. Not long ago, he said that the export of copper would be banned "probably in the middle of the year". How much will the successive restrictive measures affect the investment of Chinese enterprises? What preparations do Chinese enterprises need to make to invest in Indonesia?

Export restrictions, Indonesia does not want to be only a mineral exporter

According to the data of the United States Geological Survey, Indonesia is the largest exporter of nickel in the world, with reserves of about 21 million tons. At the same time, Indonesia is also the sixth largest producer of bauxite, with copper reserves accounting for 2.7% of the world.

For a long time, Indonesia has made profits by exporting raw ore products. However, since a ban issued by the Indonesian government in 2014, the pattern of mineral exports has changed. The ban stipulates that Indonesia will completely ban the export of unprocessed raw ores. A variety of raw ores, including nickel ore and bauxite, must be smelted or refined locally before being exported. At the beginning of 2017, the Indonesian government suspended the ban, but began to ban the export of nickel ore with nickel content lower than 1.7% in 2020.

Why does the Indonesian government insist on restricting the export of these minerals? The US CNBC website quoted the data of the "Extractive Industry Transparency Initiative" to report that although Indonesia's mineral exports are large, the contribution of the mineral and coal industries to Indonesia's GDP in 2019 was only 5%. In order to boost the economy and accelerate the realization of Indonesia's goal of zero net emissions by 2060, Indonesia hopes to get rid of raw material exports and focus on developing downstream industries. Unlike the "upstream" activity of selling raw materials only, the "downstream" policy will enhance the export value of Indonesia, provide employment opportunities and establish relevant industrial chains.

At the end of 2021, Indonesian President Joko said that Indonesia has gained a lot of benefits since restricting the export of nickel ores. With the global trend of turning to electric vehicles, the market demand for nickel, lithium, cobalt and other battery raw materials has surged. Indonesia also hopes to take advantage of its own resources to "get a share". After the introduction of the nickel ore export restriction order, Indonesia has signed more than 10 agreements on the production of battery materials and electric vehicles with global manufacturers such as Hyundai, LG and Foxconn in just three years. Indonesian President Joko said that he hoped that Tesla and BYD, the Chinese electric vehicle manufacturer, would move to Indonesia to further enhance Indonesia's position in the electric vehicle supply chain. At the same time, nickel enterprises began to list in Indonesia, with a record number in 2023.

Diversification has found a way to cope

Indonesia and China are important trading partners of each other, and China has been the largest trading partner of Indonesia for many years.

In terms of nickel ore resources, China's nickel reserves account for less than 3% of the global total. Therefore, China's nickel ore is largely dependent on imports. In addition, with the rapid development of the domestic new energy vehicle industry, China's consumption of nickel has increased rapidly. After the mining ban in Indonesia in 2014, the import source of China's nickel ore gradually shifted to the Philippines. According to the latest data of the General Administration of Customs of China, China will import 40.18 million physical tons of nickel ore in 2022, of which 83% will come from the Philippines. However, it should be noted that according to Bloomberg News, the Philippines recently said that it would also consider following Indonesia's example by imposing nickel export taxes or restricting exports.

In terms of bauxite, China's output also accounts for a small proportion. It used to rely heavily on the import of Indonesian bauxite. However, after the Indonesian government banned the export of raw ore for the first time in 2014, Chinese enterprises began to promote the diversification of bauxite import sources. Guinea and Australia have gradually become the two major sources of China's imported bauxite, and their share in China's imported bauxite has increased year by year. According to the data of the General Administration of Customs of China, in 2021, China imported 107 million tons of bauxite, of which 51% came from Guinea, 32% from Australia, and Indonesia ranked third with 17%. According to the analysis of industry experts, even if Indonesia banned the export of bauxite again in June this year, the bauxite operated by China in Guinea can also fill this gap.

As one of the suppliers of bauxite to China, Malaysia expects China to focus more on it. According to Singapore's Straits Times, Malaysia's Minister of Natural Resources, Environment and Climate Change Nenazimi said: "If a country bans the export of bauxite, the global demand will shift to any other country that can provide these resources. In this case, the demand for Malaysian bauxite will be very high, especially in China."

Chinese enterprises in Indonesia: challenges and opportunities coexist

"For local Chinese-funded enterprises, Indonesia's policy of restricting the export of minerals has brought some challenges," the head of a Chinese-funded enterprise carrying out mineral-related businesses in Indonesia told reporters. He explained that the restrictions on mineral exports would enable enterprises to invest in the downstream smelting and processing industry in Indonesia, further extending the industrial chain, which led to the competition between Indonesian local enterprises and foreign enterprises for workers, resulting in the rise of labor costs. For enterprises that mainly export energy and minerals, they need to carry out business transformation.

Merwin, an international supply chain expert from the National Bureau of Asian Studies of the United States, said that although Indonesia's export restrictions would bring some challenges to China, they also have commercial advantages and strategic benefits. The ban in Indonesia has led Chinese enterprises to shift from simply importing nickel ore to investing in nickel processing in Indonesia.

Industry experts analyzed that China's adoption of a hybrid strategy not only conforms to relevant Indonesian regulations, but also ensures the supply of nickel products to some extent. By investing in technology and joint ventures in Indonesia, China has alleviated the problem of tight supply.

In recent years, China and Indonesia have continued to strengthen industrial cooperation. In Indonesia's Sulawesi and Hamahara islands, Chinese enterprises have built refineries, smelters, new gold schools, and even a nickel museum. In 2022 alone, Chinese enterprises invested $3.2 billion in these regions. At present, Indonesia has formed a number of modern industrial parks focusing on nickel industry, including Qingshan Park invested and constructed by Indonesia Economic and Trade Cooperation Zone Qingshan Park Development Co., Ltd. and Delong Industrial Park invested and constructed by Jiangsu Delong Group.

The head of the Chinese-funded enterprise told the reporter: "For Chinese enterprises in Indonesia, tightening the export of minerals in Indonesia has a positive side. In the short term, it will reduce the price of local raw materials in Indonesia, directly drive the cost of local Chinese enterprises to reduce and increase profits. Of course, in the long term, it is also necessary to observe the downstream production capacity, because the balance of supply and demand determines the price of raw materials. For countries outside Indonesia, especially the relevant enterprises in countries that import a large number of raw materials from Indonesia, the situation is the opposite."