Indonesia’s nickel export ban: bad for itself and the global economy
The chaos at the London Metal Exchange has thrust a discrete commodity into the limelight. For the first time, nickel climbed above $100,000 per metric ton on March 8, prompting the LME to halt nickel trading for a week.
Until recently, Russian nickel made up about a tenth of the world’s supply. But Indonesia has the largest nickel reserves in the world and is already the largest producer. Now that Russian nickel is facing sanctions, Indonesia could get a windfall as buyers compete for a scarcer resource. Unfortunately for Indonesians, their government has banned nickel exports.
Nickel is a key input for stainless steel and for fossil fuels like lithium-ion batteries. Even before the invasion of Russian President Vladimir Putin unbalanced the market, the demand for nickel had risen sharply. According to Nornickel’s latest annual report, global nickel consumption has grown from just under 1.3 million metric tons in 2009 to over 2.4 million metric tons in 2020.
So why the export ban? Under a 2009 mining law, Indonesian President Joko Widodo wants companies to process nickel in Indonesia, not just mine it and ship it to the highest bidder overseas. He sees industrialization as the key to economic growth, noting that “if we transform them [raw materials] in finished products, the added value can be increased tenfold.
Analysis by Isabelle Huber for the Center for Strategic and International Studies suggests this could be a winning strategy for Indonesia. In the short term, the ban will cost Indonesia export revenue, jobs and government revenue. But Indonesia is betting that it will attract investment in nickel processing that will pay off big in the long run.
Citing $30 billion in investment in nickel processing and commitments by Chinese companies, Huber said the export ban puts Indonesia “on the right track” to develop an integrated nickel supply chain. electric vehicle batteries. Indeed, buoyed by the perceived success of its nickel policy, Indonesia is now considering banning the export of gold, copper and bauxite.
But the current nickel upheaval shows a flaw in this strategy. Indonesia’s nickel economy, now tied to a handful of Chinese companies, is insulated from potential customers who, but for the ban, would be bidding against each other for Indonesian nickel.
Essentially, the government made Indonesian nickel off-limits to the highest bidder, thereby limiting the resource’s potential to enrich Indonesians.
Only a small subset of all global nickel buyers have agreed to invest in Indonesia. The company that has been most willing to invest in soil in Indonesia is Tsingshan Holding Group – a company at the heart of China’s Belt and Road overtures to the region and, incidentally, the main beneficiary of the LME’s trade pause. .
The relationship with Tsingshan and other similar companies will bring certain benefits to the Indonesian economy. But it will also make Indonesia geopolitically vulnerable. Reliance on exclusive Belt and Road routes, rather than access to the panoply of buyers in an open global market, will weaken Indonesia’s hand as China threatens its territorial sovereignty by Wed.
Additionally, the export ban makes it illegal to ship minerals overseas, but it does not completely eliminate the activity. Bans breed smuggling and, indeed, the Indonesian Coast Guard will increase its anti-smuggling patrols amid soaring prices to catch vessels chasing the world’s high rate. The situation is both a waste of law enforcement resources and an attack on public trust.
The theory that drives Indonesia operates on the theory that its government can produce trade results superior to those produced by free trade and competition. Proponents of this theory frequently cite the examples of South Korea and Taiwan.
But as Arvind Panagariya, an economics professor at Columbia University, notes in “Free Trade and Prosperity: How Openness Helps the Developing Countries Grow Wealth and Combat Poverty,” this theory is flimsy at best; the miracles of prosperity achieved by South Korea and Taiwan have occurred despite, not because of, their industrial policies. Indeed, Panagariya argues, developing countries like Indonesia can best accelerate their prosperity by embracing free and open trade.
With a population of over 270 million and its position at the heart of the dynamic Southeast Asian region, Indonesia is poised for its own economic miracle, which could surely eclipse that of South Korea. . Trade impediments, however, are narrowing Indonesia’s paths to success. By dropping the nickel export ban (and planned export bans on other commodities), Mr. Widodo’s government would improve the lot of Indonesians and the global economy.
• Jordan McGillis is Deputy Director of Policy at the Institute for Energy Research. Anthony B. Kim is Economic Freedom Research Fellow and Head of Global Engagement at the Heritage Foundation’s Margaret Thatcher Center for Freedom.