This is not a time to be asserting
protectionist, nationalist strictures on trade
The
folly of Indonesian nationalist posturing on natural resources extraction is
coming home to roost even faster than even pessimists might have expected a few
months ago.
The
first place to look for this evidence is the price of thermal coal, of which
Indonesia is the world’s largest exporter. This has collapsed from US$135 a
tonne in late 2011 to around US$85 today. Nor is there much prospect of more
than a brief bounce. The reasons are very simple. Firstly the massive expansion
of gas production in the US has forced US coal producers to seek markets in
Asia. Secondly, Indonesian output has been rising thanks to the stimulus of
previously sky-high prices.
Now
Indonesia thinks it wants to conserve its coal and is threatening to tax
exports. But its coal resources are so large and the commitments to new
production are so well advanced that there seems little chance that exports
won’t continue to grow in volume, keeping the price depressed. In theory it
would better if more were used to generate power at home. But that is an issue
of investment in power stations not coal mines and the country has poor record
of attracting private capital into this sector.
Meanwhile
the longer-term outlook for global coal looks poor given its pollution costs
and the prospect of rising LNG output from Australia, Qatar and other sources
and further output from fracking in the US and in future in Australia and
elsewhere. China seems unlikely to benefit much from fracking due to its coal
geology and shortages of the vast amounts of water required to extract gas.
However advances in gasification techniques for low-grade Chinese coal could be
a further blow to Indonesia’s thermal coal exports.
Market
disillusion with Indonesia, until recently viewed as a bright star at a time
when the shine was coming off China and India, has been reflected in a steep
fall in the rupiah, from a peak of Rp8,500 to the dollar to Rp9,400 today. The
reasons appear to be both a direct reflection of a deteriorating export
outlook, dissatisfaction with government policies which are seen to be erratic
as well as nationalistic, and concern that the central bank was unwilling to
raise interest rates for political reasons, instead resorting to controls on
lending to rein in consumer credit.
More
immediately hurt by government policy are nickel exports. Although those from
major miners are not yet affected by plans to enforce local processing, those
of many smaller mines selling nickel ore to refineries in China and Japan have
been hit. In the short term, Indonesian policy may even have helped the global
nickel price fall less quickly than otherwise would have been the case. But the
policy has done nothing either for bauxite or copper prices. It remains to be
seen how far copper mining investment is damaged by the new rules.
Gold is
less affected because processing to concentrates is always done at mine site
due to the volume of material required to yield a single ounce of gold. However
as copper and gold are often found together the new rules are sure to deter
investment.
Indonesia’s
desire to extract the maximum value from its resources is natural enough. But
policies which are erratic and driven by domestic politics rather than devised
in full knowledge of the forces at work in the marketplace are already
undermining its attractions just at a time when the outlook for most commodity
prices has deteriorated.
Asia
Sentinel
Business & Investment Opportunities
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