Indonesia’s bauxite ban risks WTO complaint but won’t rock global supply

President Joko Widodo says the export ban will encourage the domestic bauxite processing and refining industry
While the move will spark a likely retaliation or fresh complaint to the WTO, some experts say it reflects Indonesia’s commitment to developing its industries

Indonesia

Resty Woro Yuniar

Published: 8:05pm, 21 Dec, 2022

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Indonesia’s decision to ban exports of bauxite ore in pursuit of a value-added strategy for the commodity is likely to trigger complaints at the World Trade Organization (WTO), but the protectionist move reflects a clear vision by the government to develop its industries, analysts say.

Last year, Indonesia produced 25.8 million tonnes of bauxite, making it the world’s sixth-largest producer, with 90 per cent exported overseas. The ban will also cover bleached bauxite.

The restrictions which take effect next June are part of the government’s broader plan to create jobs, increase revenue, and develop its own domestic processing and refining industry, President Joko Widodo said on Wednesday.

A tractor at a bauxite mining site in West Kalimantan, Indonesia. Photo: Shutterstock/File

“From the industrialisation of bauxite in this country, we estimate that state revenue will increase from 21 trillion rupiah (US$1.3 billion) to around 62 trillion rupiah (US$3.9 billion).”

Widodo said the latest commodity ban would replicate the country’s “success” in banning nickel ore in January 2020.

Indonesia has been pursuing a so-called “ downstreaming” policy, in which the country reaps more revenue from adding value to raw materials it produces, as miners and producers are obliged to build refining facilities onshore.

Chinese firms dominate Indonesia’s nickel industry. In the third quarter of this year, a majority of the 1,150 new Chinese investment projects were in nickel smelting and downstream processing industries, worth US$1.56 billion.

Nickel is the main component of stainless steel.

Value of nickel exports last year was recorded at US$20.9 billion, an increase from US$1.1 billion in 2014, Widodo said on Wednesday. He estimated the value of nickel exports this year will be more than US$30 billion.

Widodo has previously said that aside from bauxite ore, which is the main source of aluminium, he wants to also curb exports of copper, tin, and gold, among others. No time frame was provided for any of those potential bans.

The president rejected accusations that Southeast Asia’s largest economy was now closed-off.

“We are open for everyone, from any country. We invite any domestic or foreign companies to join us in developing the industries in Indonesia that are related to nickels, bauxites, coppers, and tins.

“But we want taxes [to be paid] domestically, dividends [to be paid] in the country, royalties [to be paid] in the country, and [to expand] job opportunities in the country. Are we not allowed to do that? We will continue [with our downstreaming policies],” he said.

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Bill Sullivan, a senior foreign counsel at the Jakarta-based law firm Christian Teo & Partners who specialises in mining projects, said domestic businesses would not be impacted, because they had been prepared to meet the government’s requirements to set up refining facilities.

He added that buyers of Indonesian bauxite in Southeast Asia were likely to have anticipated the ban, and “will have already lined up alternative suppliers/sources of bauxite ore”.

Airlangga Hartarto, coordinating minister for economic affairs, said the ban was unlikely to disrupt the global supply chain, with Chinese and Australian producers likely to make up any shortfalls.

There were four bauxite refining facilities in Indonesia with a total output capacity of 4.3 million tonnes, he said, and eight other smelters were currently being built.

“We have a huge bauxite reserves, at 3.2 billion tonnes. We expect that our reserves will last between 90 and 100 years,” Airlangga said.

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‘Vision for the future’

Meanwhile, even as the latest ban underlines Indonesia’s tendency to protect its commodities, observers say Widodo’s goal to increase state income from its abundance of raw minerals is reasonable.

“This shows Indonesia’s vision for the future to develop its industries,” said Tauhid Ahmad, executive director at Jakarta-based Institute for Development Economics and Finance.

“Our exports are mostly based on raw materials imported from overseas. The president wants to [use the ban] as a bargaining [tool] with [commodities’ producers] to increase investments in Indonesia so they don’t just extract raw materials.”

Tauhid added that domestic bauxite producers would not be impacted that much, “as long as there are industry players that will [buy] their products”.

Nerves of steel: Indonesia to appeal in nickel ore WTO, EU row

Experts however warn of likely retaliation or another complaint to the WTO, as was the case when Indonesia banned nickel ore exports in January 2020.

At that time, the European Union viewed the move as a violation of Article XI of the 1994 General Agreement on Tariffs and Trade, which says all WTO members must not prohibit or restrict imports or exports, other than duties, taxes and other such charges. The WTO recently ruled in favour of the EU, but Jakarta filed an appeal earlier this month.

On Wednesday, Widodo said Jakarta would not “hesitate” to ban exports of a raw mineral to develop the domestic refining industry.

The government would “calculate the readiness of the industry” before banning other commodities, he said.

“Once the industry is half ready, we will immediately stop [exports]. We will force the industry [to refine the raw materials domestically]. We learnt a lot from the nickel ore [export ban policy].”