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Indonesia at risk of oversupply in nickel processing capacity, says lawyer

Indonesia may be heading toward an oversupply of processing capacity, according to Norman Bissett, a foreign legal consultant with Indonesia-based Hadiputranto Hadinoto & Partners.

The country's government relaxed a ban on exports of unprocessed nickel ore earlier this year. Currently, the Indonesian government is charging export duties on unprocessed ores based on the construction progress of the individual companies' smelting plants.

"It makes sense if investors are becoming concerned about too much [nickel processing] capacity in the country, as capacity has been going up since the ban was imposed in 2014," Bissett told S&P Global Market Intelligence on March 30 on the sidelines of Mining Investment Asia conference in Singapore.

The ban has resulted in the establishment of 32 new smelters, of which 24 are for nickel, in addition to about 66 smelters that are under development, according to Bissett.

He added that while the export ban has made "some success" in the nickel segment, it has also held back investments in the mining sector in general.

The growth rate of foreign and domestic direct investment in the mining sector both dropped in 2016, with the rate for foreign investments posting declines for three years in a row since 2014, according to Bissett.

In addition to commodity prices, regulatory risk also contributed to the declines, Bissett said, noting that there had been changes to Indonesian mining law every year.

"The bigger picture is that the growth rate of investments in the mining sector is dropping," he said.

Bissett also expressed worry that the ban may affect the cash flow of miners who had to suspend or shut down operating mines following the ban.

"They just don't have the money to finance construction of smelting plants after they suspended mine operation," he said, adding that unhealthy cash flow was also preventing mining companies from making investments in the sector.

Bissett added that the Indonesian government should consider improving the stability of its policies in order to compete with countries, such as Australia, where the regulatory environment is safer and more stable.