Diversifying Investment in Indonesia’s Mining Sector

Indonesia is the world’s largest nickel producer and produces significant quantities of copper, cobalt, tin, and gold. In 2023, mining contributed to 11.9 percent of Indonesia’s gross domestic product. Over the last 15 years, Indonesia has imposed—and at times loosened—bans on raw resource exports and local ownership requirements. While the raw nickel export ban has proved effective in stimulating Chinese investment to build a robust downstream industry, history shows that a one-size-fits-all form of resource nationalism has not always been beneficial to Indonesia’s mining sector.

Lessons from the 2014 Export Ban

In 2009, the Indonesian government enacted legislation that required mining companies to establish local processing facilities or face a ban on mineral exports in five years. This policy aimed to jump-start a domestic minerals processing industry by mandating that companies process their ores within Indonesia. However, both domestic and foreign firms were hesitant to develop refining capabilities for minerals for a variety of reasons: the significant amounts of upfront capital required to build these facilities, weak commercial rationale for these investments, low ore grades that reduced profit margins, and expectations that the government might relent. The ban on raw mineral exports was enforced in January 2014.

In 2013, Indonesia produced 55.7 million tons of bauxite, surpassing China to become the world’s second-biggest producer. Bauxite is used to create aluminum and other industrial products. However, attracting foreign investment for bauxite refining facilities proved challenging due to doubts about whether Indonesia had sufficient high-quality bauxite reserves to remain a competitive supplier in the long run. This uncertainty made it difficult to justify the expensive construction of refineries. As the ban approached, Chinese operators stockpiled bauxite and began exploring alternative sources. In 2014, after the ban went into effect, bauxite production dropped by 95 percent to 2.6 million tons. Bauxite export revenue dropped from $1.3 billion in 2013 to $46 million in 2014.

During this time, Chinese operators began financing new suppliers with high-quality bauxite reserves in the Republic of Guinea, West Africa. Between 2012 and 2016, Guinea’s bauxite production increased from 17.8 million tons to 30.8 million tons—a 73 percent increase. Although the Indonesian government relaxed the bauxite export ban in January 2017 to ease pressure on local mining firms and workers and to allow more time for downstream processing facilities to be built, Indonesia’s global position in the bauxite market had permanently shifted. In 2023, Indonesia produced 21 million tons, while Guinea produced 97 million tons, the second highest in the world (behind only Australia, which produced 98 million tons).

The copper subsector had a bifurcated response to the restrictions. The two largest copper mines in Indonesia—PT Freeport Indonesia’s Grasberg mine and PT Amman’s Batu Hijau mine—were developed by two U.S. companies and subsequently became the focus of lengthy disputes with the government over post-2009 downstream processing and foreign divestment requirements. In 2014, Newmont brought copper production at its Batu Hijau operation to a halt because stockpiling facilities were full as a result of the export ban, and the government subsequently imposed additional escalating export duties on copper concentrate in order to incentivize compliance with the new domestic processing requirements. Despite attempts to negotiate with the government a middle path to keep its investments commercially viable, and facing increased pressure to comply with the new foreign divestment requirements, Newmont ultimately divested and exited Indonesia two years later. By contrast, Freeport-McMoran opted to comply with both the domestic ownership requirements and downstream development policy. In June 2024, Freeport commissioned a new $3.7 billion copper smelter in East Java; it’s expected that all of Freeport’s copper concentrate from the Grasberg mine, the second-biggest copper mine in the world, accounting for 3.3 percent of global output, will be processed in Indonesia. Today, Indonesia is the seventh-largest copper producer. In 2023, 32.9 percent of exploration investment in Indonesia’s mining sector went to copper—the second highest, behind only gold. Whether this exploration spending will result in the actual development of mines—along with requisite downstream processing facilities and power facilities to run them—remains to be seen.

Nickel: Why the 2020 Export Ban Largely Accomplished Government Objectives

In 2019, the Indonesian government announced that it would ban nickel ore exports effective January 2020. While Indonesia’s bauxite reserves weren’t enough to mobilize downstream investments, its nickel reserves had two advantages: first, Indonesia has the largest nickel reserves in the world—according to the U.S. Geological Survey, it’s home to 42.3 percent of the world’s supply. It is also home to two of the world’s five largest reserves—Sorowako and Weda Bay. Sorowako, which is owned by PT Vale Indonesia, is the fourth-largest producing nickel mine in the world.

Second, the geological fundamentals of nickel are strong. Two of the key determinants of a mine’s profitability are the recovery rate and mill-head grade. The recovery rate is the percentage of nickel extracted from raw ore. The mill-head grade is the average concentration of nickel in mined ore that is fed into a mill for processing. Of the five largest mines in the world—Kola Division in Russia, Jinchuan in China, Sudbury Operations in Canada, Sorowako in Indonesia, and Polar Division in Russia—Sorowako has the highest recovery rate (88 percent compared to 25.4 percent to 85 percent for the other four mines) and the second-highest mill-head grade (1.68 percent), surpassed only by Kola Division (2.3 percent).

Given Indonesia’s large endowments of high-quality nickel, the move to ban raw nickel exports was not met by divestment like it was with bauxite nearly a decade earlier. In contrast, there was a sharp increase in foreign direct investment (FDI), which fueled a rapid expansion in its midstream smelting and refining capabilities for nickel. Between 2019, when the ban on raw nickel exports was announced, and 2022, investment in mineral processing and manufacturing increased from $3.56 billion to $10.96 billion—a 207.9 percent increase, driven overwhelmingly by Chinese financing. The FDI has been a driver in building Indonesia’s mid-to-downstream industry. Prior to 2014, Indonesia only had two nickel smelters operating; by 2020, there were 13 operational nickel smelters, and by July 2023, there were 43 nickel smelters operating, 28 under construction, and another 24 in the planning phase. The Ministry of Energy and Mineral Resources is considering limiting the construction of class II nickel smelters. This is a result of concerns about maintaining a balance between the supply and demand of nickel ore to ensure that existing smelters have an adequate supply for ongoing operations.