Raw materials exporter Indonesia aims for downstream pivot in economy push

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Indonesia is looking to boost its economy by pivoting from exporting raw materials to downstreaming them for value addition, said a CNBC report, with the move expected to create jobs, increase profit margins and  cut down on carbon emissions.

The Southeast nation boasts mineral resources such as tin, nickel, cobalt, and bauxite, but its mining sector accounts for only a fraction of the economy. Despite large exports, the mineral and coal sector alone made up only five percent of Indonesia’s GDP in 2019, according to the Extractive Industries Transparency Initiatives.

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Notably, the natural deposits found in Indonesia including nickel are important raw materials for electric vehicle production. As part of developing its downstream functions, the country is looking at crude oil that can be refined into petroleum, diesel, and plastics.

“Indonesia always exports raw materials, while it is better to process and consume them through downstream industry or domestically,'' said President Jokowi Widodo.

As part of that plan, Indonesia banned the export of nickel ore in January 2020, and the government has pledged to gradually stop exporting other raw materials too.

“...value-added products potentially reduce coal mining companies’ financial performance at the risk of coal price volatility,” said William Simadiputra, analyst at DBS Group Research.

Going downstream also reduces exposure to fluctuating commodity prices and reliance on imports.

“Subsequently, it will create jobs ... it will generate tax income for the country, and new business opportunities, for instance, domestic companies that will export nickel ore,” the president said.

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Strengthening value chain

Nickel

Indonesia is looking to transform three key sectors for downstreaming - mining and mineral industry, the coal and fuel industry, and the agro industry.

According to Indonesia’s Investment Coordinating Board, BKPM, the country has the largest nickel reserve in the world and possesses 21 million tonnes of the metal.

The country looks to transform raw nickel into higher end products like lithium batteries for electric cars — a move the investment board said will eventually bring economic growth.

“The government is working on research regarding lithium-ion battery innovations and it is expected that within two to three years ahead we can produce lithium battery,” Widodo said in late 2020.

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Coal

Indonesia is the world’s fourth-largest coal producer, and the top thermal coal exporter globally. It is also looking to push coal projects downstream, according to Simadiputra, as coal mining companies receive royalties from the government when such projects succeed.

According to Wood Mackenzie analyst Shirley Zhang, coal mining is vital for Indonesia as not only does it help ease the current global energy crisis, but the country also benefits from the high seaborne coal prices.

Indonesia’s coal production reached 564 million tonnes in 2020, according to the International Energy Agency. The country exported 405 million tonnes of coal in the same period — or 31.2 percent of the world’s coal exports that year.

Thermal coal is a key driver of Indonesia’s economy, Zhang said, adding that manufacturing, the country’s biggest GDP contributor at 26 percent, is also driven by coal power.