Indonesia Commodity Export Rethink Rattles Metals, Miners

(Bloomberg) -- Indonesia rewrote its mineral export rules in a surprise shift of policy that rattled mining companies from the U.S. to Japan and sent copper prices to the highest in a month.

Nickel producers from Sumitomo Metal Mining Co. to Nickel Asia Corp. tumbled after Southeast Asia’s biggest economy said it will allow some exports of nickel ore and bauxite, easing a ban on unprocessed ore shipments in place since 2014. Freeport-McMoRan Inc., the U.S. company that operates the world’s second-largest copper mine in the province of Papua, dropped after the government said it must change its operating terms before it can ship overseas. Nickel fell in London while copper was near the highest in a month.

The unexpected rule changes signal a major policy shift for Indonesia, which banned exports of raw, unprocessed ores in January 2014 as it sought to develop a domestic processing industry and prevent its mineral wealth from disappearing overseas. The relaxation is bearish for nickel prices and could now dampen investment in new plants, according to Citigroup Inc. and Macquarie Group Ltd.

“There is little doubt that at a headline level this looks bearish for the global nickel market in terms of future pricing,” Macquarie Group analysts including Ian Roper wrote in a report. dated Jan. 12. “Given the previous ban had effectively worked by forcing downstream investment in Indonesia, to change tack in such a way is certainly a very strange move.”

The government will allow exports of excess nickel ore and bauxite by miners that are building processing plants in the country, Bambang Gatot Ariyono, director-general of minerals and coal at the Energy & Mineral Resources Ministry, told reporters on Thursday. Shipments will be permitted for a maximum of five years, he said. Smelters must source a minimum 30 percent of their supply domestically with low-grade nickel ore.

Smelter Projects

The country will permit shipments of ore with nickel content less than 1.7 percent, along with certain grades of bauxite, according to the regulation signed on Jan. 11. Shipments will be linked to the progress of smelter projects, which must be completed within five years, Ariyono said. Indonesia can export as much as 30 million metric tons of bauxite in 2017, said Erry Sofyan, chairman of the Association of Indonesia Bauxite and Iron Ore Producers.

Nickel prices on the London Metal Exchange tumbled as much as 5.1 percent on Thursday on the prospect of more supplies from Indonesia, before reversing losses to close 0.9 percent higher. They were down 1 percent at $10,165 a ton as of 10:35 a.m. in London on Friday.

The relaxation could allow state-owned nickel producer PT Aneka Tambang to ship as much as 70,000 tons of nickel content in ore annually from stockpiles and mine restarts over coming years, according to Macquarie. While global balances wouldn’t change much, prices around $9,000 to $10,000 a ton would become “the norm”, the analysts wrote. Citigroup said the new rules could see prices averaging $10,000 this year, potentially dropping as low as $9,500.

Nickel producers sank. Sumitomo Metal, which has production facilities from New Caledonia to the Philippines, slid as much as 8 percent in Tokyo and Western Areas Ltd. plunged 19 percent. GMK Norilsk Nickel PJSC, which rivals Vale SA as the world’s top producer of the metal, fell 1 percent in Moscow Friday after a 4.3 percent drop a day earlier.

Stocks Tumble

Nickel Asia, the largest producer of nickel ore in the Philippines, fell 14 percent, the most since August 2015. Marcventures Holdings Inc. tumbled 15 percent for the biggest loss since September. The Philippines overtook Indonesia as the biggest producer of mined nickel following the export ban in 2014. PT Vale Indonesia, the local unit of the Brazilian company, in which Sumitomo Metal has a 20 percent stake, lost 16 percent, the most since 2008.

Aneka Tambang, known as Antam, surged 6.4 percent. The company can export as much as 20 million tons of nickel ore, President Director Tedy Badrujaman said in a text message on Friday. The new regulation will help improve cash flow and raise financing for smelter projects, he said.

“We do not expect significant ore shipments from other parties involved in Indonesian nickel ore, as they either do not have the smelting plans or would be worried about cannibalising their higher revenue nickel supply,” the Macquarie analysts wrote. “Moreover, we would expect export permits would be harder to come by.”

Processed Metals

The government also changed its rules on exports of semi-processed metals such as copper concentrate. Companies including Freeport and PT Amman Mineral Internasional, which last year bought the Indonesian copper and gold assets of Newmont Mining Corp., stopped shipments earlier in the week after regulations allowing exports lapsed Jan. 11.

They must now comply with a range of rules before concentrate exports can resume, including converting their contract of work into a special mining business license or IUPK, and commit to building smelters, Energy & Mineral Resources Minister Ignasius Jonan told reporters Thursday. Miners must present plans to build smelters within five years, he said.

“There’s no obligation to convert contracts of work into IUPKs as long as companies don’t ask for a recommendation to export concentrate,” Jonan said. “We will respect contract of work holders until the contract expires, but they can only export refined products,” he said. The conversion process will take about 14 days if all the documents are available, he added.

Grasberg Mine

Copper jumped 2.2 percent in London on the new rules and was little changed Friday at $5,839 a ton. Freeport shares slumped 3.8 percent in New York on Thursday.

The Grasberg mine owned by Freeport is the world’s largest in terms of copper capacity after Escondida in Chile, according to the International Copper Study Group, while Freeport says the deposit has the single biggest reserves of gold.

Indonesia’s Energy & Mineral Resources Ministry has proposed a 10 percent tax on concentrate exports, subject to approval by the Finance Ministry, Jonan said. Freeport said on Friday that while it was unable to export concentrates, mine operations were running normally and it was reviewing the terms of converting its contract of work into a special mining business license. Amman Mineral also said operations were normal.

Among other changes, miners can seek an extension on their contract of work five years before expiry. Currently, companies can seek an extension only two years in advance. Jonan reiterated the government policy of having foreign companies gradually divest up to 51 percent of local units.

Rule highlights:

• Contract of Work holders must convert to a special mining business license or an IUPK in order to export concentrates for five years
• Companies exporting concentrates have to build smelters within five years
• Contract of Work and business license holders can apply for an extension five years before expiry; business licenses can only be extended twice
• Foreign companies with mining business licenses must gradually divest stakes to local parties five years after starting production, reaching 51 percent in 10th year
• Miners with smelters or that co-operate with smelters can export an unspecified amount of ore with less than 1.7 percent nickel content for a maximum of five years
• Smelters must source a minimum of 30 percent of their ore supply domestically with nickel content of less than 1.7 percent
• Bauxite miners that have or are in the process of building processing plants can ship washed bauxite with at least 42% aluminum oxide for a maximum of 5 years
• Exports are subject to taxes

--With assistance from David Stringer and Masumi Suga To contact the reporters on this story: Yoga Rusmana in Jakarta at yrusmana@bloomberg.net, Eko Listiyorini in Jakarta at elistiyorini@bloomberg.net. To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, James Poole