Nickel smelting and refining: A long road ahead for Indonesia

When Indonesia placed export restrictions on nickel ore early last year, the plan was to encourage the country’s mining firms to develop their own smelting and processing facilities so that Indonesia could export refined ores and concentrates, which are worth more in the market than raw ones. More than a year later, Indonesia’s ban on ore exports is stimulating investment in processing plants, but Jim Lennon, senior consultant at Macquarie, believes that the transition from exporting raw materials to refined ones will be a long and slow process.

“I think that industry will develop over the next decade rather than over the next couple of years,” Lennon said in Metal Bulletin’s recent Nickel Conference in London. This is in spite of the fact that 11 new nickel smelters will be built in Indonesia over the next two years, costing $1.4 billion, according to an Indonesian mining ministry official. Six of these nickel smelters, located in Sulawesi, are due to be finished in 2015. They will have a capacity to produce 6,000 tons of refined nickel a year plus 66,000 tons of ferronickel and 50,000 tons of nickel pig iron.

“We estimate that if all these nickel smelters are completed, in 2018 we will be able to process 30 million tons of nickel ore—50 percent of our nickel ore exports in 2013,” said Raden Sukhyar, Coal and Minerals director general.

Nickel refining. (Source)

Mining industry executives in Indonesia had initially been resistant to the idea of developing downstream industries, citing lack of power and infrastructures, even though it could potentially increase earnings. An example of this is Russian nickel miner Amur Minerals Corporation (AIM: AMC), which recently conducted studies in its Kun-Manie flagship project to determine if building its own smelter could benefit the project. The study showed underlying earnings can rise up to $3.48 billion compared to $1.17 billion under a toll option, provided that the nickel price would not fall lower than $7.50 per pound. This suggested a near tripling of Amur Minerals‘ earnings from contract smelting.

However, lack of quick growth in both Indonesia and China, the world’s top nickel consumer, might create a long-awaited global market deficit. Furthermore, implementation of Indonesia’s smelter projects since the ban had been slow, mainly due to lack of infrastructure, permit problems, and a slump in nickel prices.

“Until we see prices move significantly above current levels for some time, I don’t think you’ll see a huge investment in Indonesia,” Lennon said.

Xavier Jean, a credit analyst at Standard & Poor’s, also said that the prospect for completions this year is unrealistic. “Greenfield smelters are horribly expensive and drag down the profitability of even the best ore mining operations.”

Though Indonesia’s government remains optimistic in its burgeoning mining and refining industry, a senior ministry official hinted at the possibility of delaying the upcoming total ban on exports of copper concentrates this 2017 if miners had not built smelters in time.

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