Indonesia's bauxite export ban not expected to replicate nickel policy success

Indonesia's looming ban on bauxite exports is not expected to be as successful in spurring downstream foreign investment as its halt to nickel ore exports has been, but analysts said other factors besides the ban could encourage some Chinese companies to invest.

The country's ban on unprocessed nickel ore exports, implemented in 2020, has seen billions of dollars of Chinese investment pour into developing Indonesia's stainless steel industry and its nickel processing sector for electric vehicle batteries.

The country wants to replicate this success for aluminum by halting bauxite exports — it expects to start the ban in June 2023 — but analysts question whether Indonesia's bauxite is irreplaceable enough for a ban to prompt the level of investment that policymakers want. Bauxite is the key raw material used to produce alumina, which can be converted into aluminum.

"Now is about the time we are asking, if you want to have our minerals, let's get together," Agus Tjahajana Wirakusumah, a special adviser at the Ministry of Energy and Mineral Resources focused on accelerating industrial development, said in an interview in the adviser's Jakarta office. "Invest here and then we benefit together."

Restricting nickel exports brought foreign investment and helped Indonesia become the world's biggest nickel producer, Agus said. "The same sort of approach we are going to do with bauxite," Agus said.

Jakarta's ability to pressure the sector with an export ban is much more limited with bauxite, however, and a previous attempt several years ago did not succeed.

S&P Global Commodity Insights estimates that Indonesia will contribute 46% of global primary nickel production in 2027, as the country leverages the world's largest nickel reserves as well as a technical breakthrough by Tsingshan Holding Group Co. Ltd. By contrast, Indonesia's 473.6 million metric tons of bauxite reserves and resources amounts to only 1% of global deposits, according to data from S&P Global Market Intelligence.

Top buyer looked elsewhere

Indonesia's last bauxite export ban backfired by encouraging the country's top customer, China, to find alternative supplies. Indonesia has exported nearly all of its bauxite to China since 2011, according to data from Market Intelligence's Global Trade Analytics Suite.

Indonesia in January 2014 halted unprocessed ore exports including bauxite and nickel, but resumed shipments in January 2017 after failing to expand domestic smelting. Rather than invest in Indonesia's downstream, China increased its ore purchases from Guinea and Australia.

"First, they tapped into Malaysia and other small mine developments but over subsequent years, the fast development of bauxite mines and export infrastructure in Guinea made this country the obvious choice for growing Chinese bauxite requirements," said Edgardo Gelsomino, head of aluminum research at Wood Mackenzie.

China's alumina industry was initially hit hard by Indonesia's bauxite ban in 2014, Chen Tian, alumina senior analyst at Shanghai Metals Market, said in an interview. Companies including Shandong Weiqiao Pioneering Group Co. Ltd., Aluminum Corp. of China Ltd. and Xinjiang Joinworld Co. Ltd. began investing in Guinean mines, which gradually filled the gap left by Indonesia since 2015, Chen said.

This time, Chinese alumina companies have had plenty of time to switch to other bauxite suppliers before the ban starts, because Jakarta announced its plan in late 2021, Chen said. "We believe that all negative impacts have been digested," Chen said.

Indonesia accounted for only 3.9% of China's total bauxite imports in the first four months of 2023, compared with nearly 80% in 2011, according to Global Trade Analytics Suite.

Weighing proximity, risks

Despite China's diversification away from Indonesian supplies, Jakarta still stands to benefit from Chinese aluminum producers' growing interest in investing overseas due to Beijing's climate change policies and the depletion of China's own bauxite resources.

Indonesia remains an ideal investment destination for Chinese firms thanks to geographical proximity, said Wang Lixin, vice president of Wuxi Zhonglianjin E-Commerce Co Ltd. Some large aluminum companies are likely to increase their investment in Indonesia, but at a smaller scale than the levels seen in the nickel supply chain, Wang said.

"Chinese bauxite reserves are insufficient [to meet domestic demand] and reliance on imports has increased. Shifting alumina production to coastal regions or overseas has become a trend," Shandong Nanshan Aluminium Co.Ltd. said in a filing to the Shanghai Stock Exchange in October 2022. Subsidiary PT Bintan Alumina Indonesia started production at its 2 MMt/y alumina plant on Indonesia's Bintan Island in October 2022, and plans to build a 250,000 t/y aluminum plant by 2026.

China Hongqiao Group Ltd.'s majority-owned PT Well Harvest Winning Alumina Refinery in Indonesia has capacity to produce 2 MMt/y, after its second phase was commissioned in 2022.

Building out the downstream sector in Indonesia is in line with these companies' strategic plans, rather than a response to Indonesian export policies, SMM's Chen said. They must weigh Indonesia's close proximity and better infrastructure compared with Guinea, against Jakarta's reputation for policy uncertainty and governance risks like revoking mining permits without notice, Chen said.

For some companies, Guinea may be the more attractive option. "It will continue to be easier for Chinese consumers to replace Indonesian bauxite with Guinean ore, than to commit to investing in alumina refineries in Indonesia," Wood Mackenzie's Gelsomino said.

Wood Mackenzie estimates that Indonesia could mine 20 MMt to 25 MMt per year of bauxite, but the currently operating alumina refineries only require a combined 8.5 MMt/y, rising to around 13 MMt/y by 2026.

Chen estimates that the export ban will result in Indonesia having a bauxite surplus of at least 5 MMt/y to 6 MMt/y, while Agus said four alumina refineries would be able to consume local bauxite.

But "if nobody takes the bauxite ... we can keep it in the ground," Agus said. "We have to save it from generation to generation. If we sell everything outside, then what are we going to give to my great-grandson?"

While Jakarta had previously said it would ban all unprocessed metals starting in June, Agus said that the government is still considering the timeline.

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