UI report opens a window on the struggling bauxite industry.

The University of Indonesia’s (UI) faculty of economy and business (LPEM) was contracted by Tambang magazine to prepare the report “Study of the estimated potential illegal export of bauxite from West Kalimantan” [UI report]. This was completed with press release (December 2016) that included the justification for maintaining the raw ore export ban for bauxite. However reading the full report shows there is also evidence to suggest the raw ore export ban and smelter program may not be delivering the best outcome for Indonesia today.

The following article is based upon a Google translation of the UI report, plus other material. I apologize for any misinterpretations or errors.

Plenty of Bauxite Ore.

Lateritic Bauxite is derived from strong tropical weathering of igneous rocks that leaches out silica and iron to leave a residual rich in aluminum. Most Indonesian deposits have a thin overburden of poor quality clayey soil, with the underlying ore zone being a mixture of clay and rock fragments. Upon open cast mining the ore is typically washed to remove the clay leaving the rock fragments as product. Traditional exploration is to manually dig shallow pits (often about 8m) or to use core drilling to sample the ore / rock fragment zone down to bedrock. Geological models define thicker zones with a high percentage of rock fragments returning encouraging assays of aluminum and low concentrations of detrimental elements.

The UI report states that the principal bauxite resources are found in the provinces of Riau, West Kalimantan, Central Kalimantan, and Bangka Belitung. Data from the Centre Geological Survey (2011) showed the Indonesian bauxite resources at 700.34 million tons, (240.90 million tons of metal), with a reserve of 280.39 million tons (100.96 million tons of metal). In a separate presentation, (Sep 2016) Armin Tampubolon of the Geological Agency states that the nations bauxite ore resources at 2015 are 3.6 billion ton (1.7 billion ton metal) and 1.25 billion ton reserves with 0.57 billion ton metal. However the UI report also refers to the West Kalimantan mines department (2011) expectation that their resources alone to be in the order of 3.29 billion tons. The reliability of many geological reports is highly variable, though a number of larger companies endeavor to produce good reports. The bauxite export boom stimulated exploration whereupon the realization of Indonesia’s wealth was greatly expanded. Exploration was abruptly stopped at the time of the implementation of the raw ore export ban (Jan 2014), so there may be further unexplored bauxite potential within Indonesia.

The above national resource numbers suggest an overall grade of 30% aluminum, however the bauxite grade is variable. In Ir. A.R. Chairil’s report to support the raw ore export ban [Constitutional court ruling 10/PUU-XII/2014] he referrers to bauxite of with a grade of 12% selling for $19/ton.  Indeed the various references used to develop this article poorly define the bases of resources / reserves (insitu, mined, washed etc) and the grade bases.

The UI report presents a table of bauxite ore exports for several years. The 2013 export figures are for Kepulauan Riau 17,299,616 ton, Kalimantan Barat 18,607,668 ton, Kalimantan Tengah 17,164,052 ton, Riau 5,646,729 ton and Sulawesi Utara 0 ton for a combined export of 58,718,128 ton. The previous year’s exports combined totals were 30.2 million ton (2012) and 39.6 million ton for 2011. This data suggests to the writer that the presently defined bauxite ore (say 4 billion ton) is sufficient for many provinces throughout Indonesia to export raw ore (say 40 million t/y) for 100 years.

The UI report indicates that approximate 500 million tons of West Kalimantan’s reserves would be sufficient for the PT. Well Harvest Winning Alumina Refinery (WHW). The writer notes that recent news reports (Oct 2016) indicates the first phase target of 1 million ton/year product is likely to only reach 500- 600 thousand ton in 2016, and expansion has been put on hold as recent sales (Oct 2015) at US$250 /ton are below production costs of  US$280/ton.

The data from the Geological Survey (Sep 2016) indicates there are 5 bauxite IUP’s supporting the existing 2 smelters with a capacity of 3.8 – 12.8 million tpy, along with 7 planned smelters with projected capacity of 44.9 million tpy to consume a reserve of 1.2 billion tons over 98 years.

Value for Indonesian.

The UI report gives an excellent table setting out the value of bauxite ore exported for each province over several years. In 2013 Kepulauan Riau  (Rp 5,319,965 million), Kalimantan Barat (Rp 3,425,886 million)  Kalimantan Tengah (Rp 3,520,135 million), Riau (Rp 2,309,467 million) and Sulawesi Utara (Rp 0 million) exported ore for a combined export of Rp 14,575,453 million. The previous year’s combined totals exports (2012) were Rp 5,668,678 million and Rp 6,554,438 million for 2011. The UI report estimates the economic multiplier flow on from this raw ore export business would impact many other sectors and stimulated the West Kalimantan overall economic output to rise from Rp 5.22 trillion in 2010 to Rp 11.3 trillion in 2013. Modeling indicates bauxite ore exports contributed Rp 2.44 trillion to West Kalimantan household incomes in 2013.

The royalty for bauxite ore is set at 3.75% of sale price, Therein the writer estimates the royalty value for total raw bauxite ore exports of 58.7 million tons for 2013 was Rp 546,580 million, for 2012 was Rp 212,575 million and for 2011 was Rp 245,791 million. The UI report also looks upon the Malaysian rapid expansion of bauxite production in response to Indonesia’s raw ore ban in January 2014. The UI report estimates Indonesia lost sales worth Rp 870,401 million (2014) and Rp 6,889,499 million for 2015, representing a loss of royalty of US$290 mill for 2014-5.

The UI report implies the WHW smelter requires 2 ton of bauxite ore to produce 1 ton of SGA product. ANTAM reports (Oct 2015) it is planning to build a Smelter Grade Alumina Refinery (SGAR) in West Kalimantan that will require 6 million wet metric ton (wmt) of bauxite ore to produce 1 million ton of SGA product. Thus the bauxite ore grade varies throughout each deposit, however the government may expect an overall much lower royalty from the significantly less tons mined and the expected lower international price per ton.

The government should be entitled to receive several forms of income from the 58 million ton (2013) of exports of raw ore, including VAT on contract mining, barging and other forms of contract works, on income tax for wages plus company profit tax. For example the 2013 annual report of PT. Citra Minera Investo Tbk (CITA) lists 2013 production of bauxite at 12.06 million ton for net sales of Rp 4,124.94 billion delivering a gross profit of Rp 2,212.36 billion and Nett income of Rp 686.67 billion. The EITI 2013 report shows their main subsidiary PT. Harita Prima Mineral (HPM) paid a royalty of US$ 7.714 million and corporate income tax of Rp 59 billion, plus land and building tax of $160,000 plus corporate social responsibility of Rp 647 million. We will be able to compare the Governments income from the new CITA business with WHW based on around 0.6 million ton of product from smelters once their 2016 annual report is released. The WHW smelter capital cost is about US$ 1.5 billion, and includes a US$ 455 million loan to a syndicate of overseas and local banks. This writer assumes it may be many years before WHW is in a financial position to contribute a significant profit tax to the Government. The WHW smelter is 70% foreign owned, and thus Indonesian companies will get a 30% share of the profits after tax. Unfortunately the UI report does not provide detailed data nor examine these forms of revenue that should flow to the Government, or details on the ownership of the bauxite IUP’s.

The UI report notes that the WHW smelter is located in a remote area to reduce raw ore transportation costs. The district and province are not sufficiently developed to take full benefit for the construction and operation of the smelter. Fuel oil, heavy equipment, chemicals and workers are brought in from other parts of Indonesia, or imported. The downstream options (shopping etc) are also few. The multiplier index captures the increase in the economic spill over between industries. The bauxite to Smelter Grade Alumina (SGA) multiplier of 1.07 is amongst the lowest on the national scale of 185 sectors. However it would seem most of this WHW product is exported, and thus the real multiplier index may be much lower. Smelters that produce aluminum metal ready for industrial use have a higher multiplier index.

Manpower.

The UI report is very useful in providing some manpower information for West Kalimantan, wherein the mining and associated sector employed around 80-85 thousand people between 2011 –2014, however this dipped to 37,312 workers by 2015.  The UI report attributes much of this drop of 47,000 people to the 2014 raw ore export ban leading to dismissals from the West Kalimantan bauxite mining industry. WHW plans to employ about 2,500 people for smelting and transport of its product.  The UI report derives the manpower multiplier effect of 1.42 for mining without a smelter, as compared to 1.87 people employed with a smelter. So if we look at the wider picture (47,000 X 1.42 = 66,740 for mining lost jobs) and (2,500 X 1.87 = 4,700 for mine & smelter new jobs). The distribution of jobs is not bought out by the UI report, whereas the raw ore export was carried out from multiple mines that brought jobs to a wide range of small towns, districts and provinces, to be replaced by just a few mines to feed the smelters in one or two districts.

Illegal Bauxite

UI report acknowledges that it is very hard to identify the existence of illegal bauxite mining practices, and there is no clear definition of “illegal mining”. This UI report makes up its own definition of the term “illegal”, being all factors not compliant with C&C, forestry and such regulations. The UI report then looks for secondary data to indicate the scale of possible illegal mining. The main suspect is the sudden increase in Malaysian and other countries bauxite exports may have been sourced in West Kalimantan / Riau and exported through neighboring countries. The UI report acknowledges the government’s difficulty in supervising and control of the scattered remote mines before and after the raw ore export ban. However prior to the export ban, the writer recalls seeing many bauxite barges passing Pontianak, and on the Kapuas river where the supervision of thousands of barges appeared to be strict. There were not so many other bauxite ports on the west coast of Kalimantan. The writer recalls that the Indonesian navy was put on alert in the Sumatra straits to enforce the raw bauxite export ban. Given that one of the inferences contributing to possible illegal bauxite exports may have been associated with poor implementation by the Government, then perhaps the term “unauthorized” or similar would be more appropriate than “illegal”, as the UI report confirms it was not able to find any physical evidence of illegal bauxite mining in West Kalimantan.

This writer suggests researchers seeking to identify illegal production may look into the Extractive Industry Transparency Initiative (EITI) report of 2013. EITI is the formal body to reconcile industry payment of taxes and fees to the government, and the government’s acknowledgement of receiving such income. The EITI reports on only one IUP bauxite mining company, (HPM) that we know exported 12.06 million ton, and Aneka Tambang’s 2013 annual report shows bauxite production was 0.5 million ton, so the other 45.5 million ton must be assumed to be from many small companies that did not meet the EITI threshold, or the government’s records were not made available to EITI.

Unfortunately the UI report does not confirm if the present smelter program is supported by such “legal” mining.

Environment.

The UI report considers the comparative Environmental Quality Index of West Kalimantan (2014) is better than the national average for air and water, but the oil palm plantations bring the forest index slightly lower than the national average, while bauxite mining is not considered a major cause of the reduction of forest index. Similarly it appears the Village Office reports or natural disasters ratings do not highlight mining as a major consideration. However some NGO’s reported (2016) some mines supplying smelters with bauxite were lax in immediately undertaking reclamation activities, and some closed mines were yet to complete reclamation and rehabilitation.

Miners & Other Smelters

The UI report briefly mentions the other Indonesian aluminum smelters. PT. Indonesia Chemical Alumina (ICA) shall export most of its Chemical Grade Alumina (CGA) from Sanggu in West Kaliamantan. While PT Borneo Alumina Prima (BAP) and PT. Well Harvest Winning (WHW) will export most of their Smelter Grade Alumina (SGA), both are located in Ketapang Regency of West Kalimantan. Some products may be sent to PT. Inalum in Sumatra, however at present Inalum imports its feed to produce aluminum metal, and most of its metal is exported. In 2013 there were 74 bauxite IUP concessions with 26 companies exporting bauxite ore from West Kalimantan, but in 2016 there are only 7 IUP holders left to mine bauxite and supply the smelters.

Conclusion & Recommendations

The UI report outlines the effect of the raw ore export ban as;-

• “Cessation of bauxite mining activity significantly lowers aggregate income, reduces foreign exchange reserves from exports, creates unemployment, and reduces government revenue. In 2014, West Kalimantan Gross Regional Domestic Product that is mainly supported by mining is estimated to have decrease by Rp 6,9 trillion, foreign exchange reserve decrease by US$510 million, and mining workers who became unemployed are around 47 thousand. The cessation of mining activity has eliminated government revenue from bauxite royalty by around Rp200 billion in 2014 and removed a number of companies and individual income tax payers in the bauxite sector. Termination of bauxite mining activity has also likely contributed to the decline of heavy equipment rental industry, transportation and construction.”
• The export ban has encouraged the establishment of domestic bauxite ore processing industry. The philosophic goal of the bauxite export ban is to increase economic growth and job creation. This should be achieved when all raw materials can be processed domestically and when the final products are used for the domestic metal industry, with the remaining products being exported. However the UI report indicates most/all of the bauxite is being processed into SGA and exported.

The UI report recommends that government supervision should be strengthened and the industry supported with further planning, infrastructure and encourage investment and local content.

The UI report focuses mainly on West Kalimantan and WHW. However the negative impact of the raw bauxite ban may have been more sever in the provinces where ore exports were stopped and new smelters are not being built, particularly Riau and Central Kalimantan. Clearly there are ample resources of bauxite that are being withheld from delivering a livelihood and a future for many hundreds of thousands of Indonesians across several provinces. The raw ore export ban and the smelter program only benefits a very few selected Indonesians.

The smelter program was initiated at a time of good commodity prices. Since then the international price of bauxite and alumina products has fallen sharply, as demonstrated by WHW’s present production costs being above market price. There is some gossip that a new smelter could be built in northern West Kalimantan to take advantage of cheaper power imported from Malaysian hydro electric plants. The philosophic goal of smelter development only works if the smelters can make a profit, and it looks like they are struggling. The government’s defense of the raw ore export ban / smelter program in the 2014 constitutional court documents admits to the prediction that there will be a short term loss in government revenues, “but in 2017 there will be a surge in revenues”.

• An independent detailed study is urgently required to review the bauxite / aluminum industry so the government may adjust their policy in order to more quickly bring greater benefits to a wider range of the Indonesian people.

The WHW smelter program shows us that raising significant capital to construct a smelter requires divestment and large loans at the construction phase. Note that one recent press release mentions that during much of 2015, CITA had no income while it was building the WHW smelter. This writer suggests a more beneficial form of raising domestic capital (and retaining a greater domestic share in the smelter) may be by allowing responsible mining to export bauxite ore in order to build up capital and confidence, to support future smelters when they become viable.

This is a limited, though good report. Clearly more data is required; however the obstacle of the government’s poor data management/coordination remains a significant issue for researchers.  If Indonesia is to succeed in the smelter program, it needs to attract investment based upon transparent and balanced research