Analysis of the Impact of Indonesia's Ban on Bauxite Exports

Indonesia is a major producer and exporter of bauxite, a key mineral used in aluminum production. However, starting from June 10th, the Indonesian government has implemented a ban on bauxite exports.

Indonesian President Joko Widodo has stated that the ban on bauxite exports is motivated by various factors. This policy aims to increase the value-added of natural resources, create more employment opportunities, boost foreign exchange earnings, and promote economic growth.

This is not the first time Indonesia has imposed restrictions on bauxite exports. As early as 2009, there were discussions about banning the export of unprocessed minerals. In 2014, the country implemented its first restrictions on bauxite exports, which were later lifted in 2017.

Objectively speaking, Indonesia's domestic capacity for aluminum processing is insufficient. The challenges and impacts of implementing a blanket ban on bauxite exports should not be underestimated.

Hoping to break free from the "resource curse"

For a long time, Indonesia has relied on exporting raw mineral products for profit. Official data shows that in 2022, Indonesia produced 27.7 million tons of bauxite, but only absorbed 7.8 million tons domestically.

While this has generated significant foreign exchange for Indonesia in the short term, it has also trapped the country in the "resource curse." Data shows that in 2019, the mining and coal industry contributed only 5% to Indonesia's GDP.

Bauxite is the ore used to produce aluminum. The Indonesian government hopes that the ban will promote transformation and upgrading by keeping high value-added products in the country, attracting companies to establish factories in Indonesia, increasing tax revenue, creating employment opportunities, and ultimately breaking free from the "resource curse."

However, the previous ban in 2014 did not achieve the desired results. On the one hand, it caused businesses that relied on Indonesian imports to seek alternative supply sources globally. On the other hand, Indonesia only saw the addition of one new smelter, leading to a significant decline in export earnings and economic setbacks. The ban was lifted in 2017.

In recent years, the Indonesian government has frequently discussed the issue of banning mineral exports. The government has also enacted relevant laws to address this matter.

In December of last year, the long-awaited ban on bauxite was announced and was set to be implemented on June 10th of this year. According to estimates by the Indonesian government, the development of downstream industries related to bauxite mining will increase the country's income from approximately 21 trillion Indonesian rupiahs per year to around 62 trillion Indonesian rupiahs per year.

Can the ban on Aluminum replicate the ban on nickel?

In the early years, Indonesia exported nickel ore with an annual export value of only $1.1 billion. However, after banning nickel ore exports in January 2020, the export value of the nickel industry surged to $20.9 billion in 2021. In 2022, Indonesia's nickel industry export value surpassed $30 billion.

The success of the "ban on nickel" serves as strong evidence for the "ban on aluminum". President Joko Widodo has mentioned the significant economic benefits that the "ban on nickel" brought to Indonesia, including a substantial increase in the value-added of mineral products, the creation of new job opportunities, the enhancement of economic prestige, and the balancing of trade relations with major trading partners. When announcing the "ban on aluminum" policy, he also cited the example of the "ban on nickel".

However, whether the success of the "ban on nickel" can be replicated with the "ban on aluminum" in Indonesia remains to be seen. According to estimates from the Indonesian Ministry of Energy and Mineral Resources, this policy will affect around 20 million tons of bauxite.

Absorbing 20 million tons of bauxite is not an easy task. As of June 9th, the Indonesian Minister of Energy and Mineral Resources, Arifin Tasrif, stated that there are currently four operational smelters, but they are unable to operate at full capacity due to a shortage of raw materials. The ministry also found discrepancies in the construction progress of seven bauxite smelters compared to the reports submitted to the government, while eight refining facilities are still under construction.

The Institute for Economic and Financial Development of Indonesia (Indef) believes that the intention of the ban is good, but it is currently premature to implement it. Indonesia still has a limited number of bauxite processing and refining facilities.

President Widodo also admitted that Indonesia will experience a decline in the export volume of the commodity in the early stages of the continued ban on raw bauxite exports. However, the benefits will be felt after two to three years.

"The List of Export Bans" is getting longer

"The list of export bans" is getting longer in Indonesia, which is an important exporter of energy resources.

Earlier this year, Indonesia's Minister of Investment and Head of the Investment Coordinating Board, Bahlil Lahadalia, stated that by 2040, at least 21 strategic commodities will be banned from being exported in their raw material form. These commodities mainly cover minerals, coal, oil, marine resources, and other sectors.

However, past experiences have shown that some export bans have been in a state of flux. For example, the palm oil export ban was only implemented for three weeks, and the coal export ban lasted less than a month.

The duration of the current "ban on aluminum" remains uncertain. In recent years, the Indonesian government has been introducing policies to restrict the export of metal minerals and encourage the development of mineral processing and downstream industries. Industry insiders believe that without sufficient preparation, such bans may have unintended consequences.

Ronald Sulistyanto, the Acting Chairman of the Indonesian Bauxite and Iron Ore Entrepreneurs Association, has stated that constructing a legally compliant smelter is not as easy as flipping one's palm.

The current economic environment is also not favorable for Indonesia to implement the "ban on aluminum." Recently, Indonesia revised down its economic growth target for the next year, setting the upper limit of expected growth at 5.7% but lowering the lower limit from 5.3% to 5.1%.