RI bans bauxite exports as US implements IRA
The Indonesian government is going ahead with its ban on bauxite exports, effective from June 10, to enhance mineral downstreaming. This commitment remains steadfast, even in the face of challenges presented by the implementation of the Inflation Reduction Act (IRA) by the United States.1
The ban on the export of raw bauxite is in accordance with Law No. 3/2020 on minerals and coal mining, in which the government aims to promote increased value-added industrialization through the processing and purification of minerals within Indonesia, transforming the country from merely a raw material supplier.
President Joko “Jokowi” Widodo said the domestic bauxite industrialization is projected to boost the country's revenue to Rp 62 trillion (US$4.15 billion), almost threefold from the current Rp 21 trillion, as a result of added value.2 In the form of bauxite ore, the market price is approximately $18 per tonne, while the selling price of bauxite refined into alumina rises to $350 per tonne, and even higher after being further processed into alumina products, reaching $1,762 per tonne.3
Therefore, the prohibition on exporting raw minerals is considered a highly strategic move to drive forward mineral downstreaming in Indonesia and ensure that the country does not miss out on the momentum of the energy transition trend, particularly in developing the ecosystem of battery and electric vehicle (EV) supply chains, especially now that the US has implemented the IRA.
Through the IRA signed by US President Joe Biden on Aug. 16, 2022, the US government allocates a substantial sum of $370 billion in green subsidies, which includes a $3,750 credit for vehicles meeting critical minerals requirements, such as containing a threshold percentage of critical minerals extracted or processed in a country with which the US has a free trade agreement (FTA).
Regrettably, this does not apply to critical minerals extracted or processed in Indonesia as the country has yet to forge an FTA with the US. This could potentially dampen the enthusiasm of battery and EV companies for investing in Indonesia, mainly if they strongly focus on exports. Furthermore, the EV market in the US and Europe is viewed as more promising in the foreseeable future.4
To be able to take advantage of the IRA, the Indonesian government in April submitted a proposal for a limited FTA with the US. Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan, said that Indonesia held a strong bargaining position to propose a limited FTA due to its significant potential reserves of critical minerals for battery and EV raw materials.
Through a limited FTA, Indonesia aims to secure green investment commitments from various global companies in Indonesia and maintain its competitiveness as an investment destination for the batteries and EV supply chain ecosystem.5
Several investment commitments in the downstreaming of critical minerals and coal in Indonesia have recently been canceled due to the strong appeal of the IRA for global investors. For instance, Air Products & Chemical Inc (APCI) recently withdrew its investment commitment of $2.1 billion, equivalent to Rp 30 trillion, to develop coal gasification into DME in collaboration with PT Bukit Asam (PTBA) in Muara Enim, South Sumatra, earlier this year.
Furthermore, PT Air Products East Kalimantan (PT APEK) also withdrew its investment of Rp 33 trillion from a joint venture with PT Bakrie Capital Indonesia Group and PT Ithaca Resources for a coal downstreaming project, specifically for methanol production in an agreement with a subsidiary of PT Bumi Resources (BUMI), Kaltim Prima Coal (KPC).
Energy and Mineral Resources Minister Arifin Tasrif said APCI's withdrawal from the coal downstream project in Indonesia was due to the government's package of incentives and subsidies for renewable energy (EBT) being considered unattractive.6
Meanwhile, the bauxite export ban policy is facing criticism, particularly from bauxite miners in Indonesia. Ronald Sulistyanto, the acting chairman of the Indonesian Bauxite, and Iron Ore Entrepreneurs Association (APB3I), argues that implementing the bauxite ore export ban is unrealistic.
Ronald claims that many bauxite miners in Indonesia are having difficulties in complying with this policy, emphasizing that the development of bauxite smelters in Indonesia is not yet ready to handle the volume of bauxite ore production, which has an annual capacity of up to 30 million tonnes.
Energy ministry data show that there are currently eight bauxite processing and refining facilities (smelters) still under construction in Indonesia, while only two bauxite smelters are operational. The maximum processing capacity of the two smelters is only 12 million tonnes. Therefore, more than half of bauxite ore produced annually cannot be absorbed for domestic processing yet.7
The lack of capacity in available bauxite smelters in Indonesia can be attributed to the lack of funding from investors and banks. Ronald explains that building bauxite smelters in Indonesia requires a capital expenditure (capex) of up to $ 1.2 billion, equivalent to Rp 18.2 trillion. Therefore, he believes it is an immense challenge for investors to commit to such a significant investment.8
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