Mining News

Indonesia’s export ban could help Canadian nickel producers

Posted by Alana Wilson on 2/3/2014 12:07:26 PM

By Alana Wilson

Canadian nickel producers are more optimistic about their futures as Indonesia’s ban on raw mineral exports took effect in January. A report in the Globe and Mail notes that the ban has already pushed up nickel prices based on fears of a possible shortage. The full effects may not be immediately known however as China –the world’s largest consumer of nickel—has been hoarding an estimated year’s supply of the metal in anticipation of the ban.

Indonesia is the world’s largest producer of nickel and is responsible for about 20 per cent of global supply.

Although there is currently a glut of nickel on the market, the world could start running out of the metal in 2015 if the Southeast Asian country keeps the ban in place. That could send prices back into the double digits.

However, whether the ban holds firm is still in question. BMO Nesbitt Burns commodity strategist Jessica Fung notes that the “market is still expecting that there will be exceptions to the rule” and she doesn’t expect a complete ban on ore exports to last more than a few months. The current ban is the result of a 2009 law that required the processing of all ore domestically by 2014. However, Indonesia has few smelters and lacks the capacity to refine all ore domestically.

In addition to refining capacity issues, policy uncertainty has further compounded the challenges for mining companies operating in Indonesia. According to a recent article by Frik Els:

In a last minute compromise, Indonesian officials amended the rules under the ban, allowing base metals including copper, manganese, lead, titanium, zinc and tin to be exported in concentrate until 2017.

But the country then slapped a concentrate export tax of 20% on these metals which will escalate to a whopping 60% by the second half of 2016.

Reuters reports the "surprise and last-minute inclusion of an escalating export tax on metal concentrates appears to have forced all other miners to stop shipments"

Indonesia’s policy uncertainty is also harming its relative attractiveness to further investment in mining exploration, as measured in the Fraser Institute Survey of Mining Companies. This survey attempts to assess how mineral endowments and public policy factors such as taxation and regulatory uncertainty affect exploration investment.

The 2012/2013 survey results show that mining companies rate Indonesia’s geological attractiveness as very high. On a survey question regarding the pure mineral potential (i.e. assuming a best practices regulatory environment and competitive taxation regime) Indonesia was ranked for 3rd of 96 jurisdictions, tied with Papua New Guinea and behind only Mongolia and the Yukon Territory.

Yet Indonesia was ranked last (96th of 96 ranked jurisdictions) in terms of its overall policy attractiveness, suggesting that it is the least attractive jurisdiction in which to invest based on policy factors. Indonesia has also been among the 10 least attractive jurisdictions ranked in the survey every year since 2000/2001 with the exception of 2009/2010 (where it was ranked 62nd of 72 ranked jurisdictions). Ongoing policy changes on raw ore exports and escalating export taxes seem unlikely to boost the confidence of mining companies to invest any time soon.

Indonesia’s loss may provide a silver lining for Canada’s nickel industry. According to Els, nickel prices are up 10% since the ban came into effect.

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