MACROECONOMICS AND BUSINESS ENVIRONMENT

ANALYSIS ON THE FUTURE EXPORTS OF INDONESIA

Lecturer:

Prof. Andrea Mantovani

Made by:

Hendsun
Stephanie Olivia
Martinus Hanandito N P L
Fidelis Gultom
Levina Ameline Moelyono

DOUBLE DEGREE EXECUTIVE MASTER OF MANAGEMENT & MASTER OF

HOSPITAL BATCH JANUARY 2021
1. Background

As the world's largest producer and consumer of palm oil, the palm oil industry has become an
important part of Indonesia's economy. With this production volume, Indonesia supplies around 55% of
the world's total palm oil production which is 58.9 million tons. This figure puts Indonesia as the world's
largest producer of palm oil, ahead of Malaysia, Thailand and Colombia (Rifai, 2014). 2

1.1 The European Union bans Indonesia’s palm oil exports.

Currently the Indonesian palm oil industry is currently facing major challenges that began with
the issuance of the European Union (EU) Parliamentary resolution on palm oil and rainforest
deforestation. Furthermore, the European commission passed delegated regulation No. C (2019) 2055
final on High and Low ILUC risk criteria on biofuels. This is seen as a form of discrimination against
palm oil that contains of political motives and business competition considering that Indonesian palm oil
products that comply with international regulations and sustainable development goals. 3

1.2 Trade Retaliation between European Union and Indonesia

Indonesia plans to retaliating EU products after the anti-dumping policy carried out by the
European Union, Indonesia has responded to many counter measures against this policy. The large
number of imported products from the European Union was taken into consideration for retaliation or
retaliating against economic sanctions for the European Union. One of the European Union's biggest
imports to Indonesia is aircraft and its components. Apart from aircraft and its components, Indonesia
also plans to threaten by imposing import duties on dairy products from the EU. This flow has been going
on for a long time and is one of the most important imports carried out by the European Union. If counter
sanctions policy is to be implemented, it will allow the EU to reconsider stopping this policy. 4

The World Trade Organization (WTO) does not prohibit its members from taking measures to
safeguard the domestic market or protectionism by imposing import duties set by each country. In
principle, trade safeguards cannot be targeted only at imported products from certain countries. This is
because the imposition of safeguard measures by the importing country feels that it is discriminated
against the importing country. In the WTO Safeguards Agreement, it is stated that the exporting country
can seek compensation through consultation. If no agreement is reached, the exporting country can
retaliate by taking equivalent actions, for example by increasing the import tariffs of countries that apply
security measures. Trade retaliation measures have been regulated in article 8 of the WTO Safeguards
Provisions.5

1.3 Indonesia bans Nickel ore export as a respond.

Indonesia's strategy is to protect nickel products. Indonesia's ban on nickel exports to the EU is a
new measure with protection as its main purpose. The ban on nickel exports is based on one factor: if the
EU limits Indonesia's CPO exports, Indonesia will also limit exports from the European Union so that the
ban on nickel exports by Indonesia can be the Government's strategy in dealing with the EU. Indonesia is
currently listed as the second-largest nickel exporter for the steel industry in the EU countries. So that the
export ban has succeeded in making the EU react.[6] Indonesia's campaign against EU countries and the
nickel protectionism policy has provided an opportunity for Indonesia to influence the EU to re-negotiate
EU policies regarding the prohibition of imports of Indonesian CPO. The EU has previously determined
that it will ban Indonesian CPO imports in 2021, but the plan will be renewed by the EU (Deutsche
Welle, 20/06/2018). 7
2. Identification of Issue

Nickel is a chemical element with the symbol Ni and atomic number 28. It is a silvery-white
lustrous metal with a slight golden tinge. Nickel is categorized as non-renewable mining with limited
resource in the world. More than 2.7 million tons of Nickel per year to be mined worldwide and
Indonesia is the largest producer with around 800,000 tons per year. The global production of Nickel is
presently used as follows: 68% in stainless steel; 10% in nonferrous alloys; 9% in electroplating; 7% in
alloy steel; 3% in foundries; and 4% other uses (including batteries). Nickel is used in many specific
industrial and consumer products, including stainless steel, alnico magnets, coinage, rechargeable
batteries, electric guitar strings, microphone capsules, plating on plumbing fixtures. Nickel is
recognizable due to some advantages such as corrosion resistance metal, easy to mixed, easy to be
recycled, has a magnetic property, light and strong, and strategic commodity.

2.1 Worldwide and Indonesia’s Nickel Reserve

Nickel reserve worldwide is limited. Based on United State Global Survey (USGS) released in
January 2020 and Badan Geologi 2019, Nickel proven reserve worldwide around 139,4 million tons with
producer country Indonesia 52%, Australia (15%), Brazil (8%), Russia (5%) and other countries Cuba,
Philippine, China, Canada (20%). Indonesia as the largest Nickel producer has reserve around 4.5 Billion
tonnes with proven reserve around 72 Million tonnes. Nickel exploration and exploitation is mostly in
Central Sulawesi (90%), South Sulawesi, Southeast Sulawesi and North Maluku.

2.2 Future Demand of Nickel

Nickel demands worldwide will increase in the future while the supply will be declined naturally.
At present, world demand on Stainless Steel is still dominant (71% of global demand) and in 2040 global
demand on Nickel is predicted more than 4 million ton (Wood Mackenzie) with Stainless Steel demand
around 48% of global demand and there will be significantly increased in battery demand from 0.163 ton
in 2019 to 1.22 million tons in 2040. Government of Indonesia aims to use this opportunity to drive and
create added value of Nickel by processing it domestically. Nickel is expected to become future export of
Indonesia. In the downstream, some infrastructures have been prepared with eleven (11) smelters that
have been operated with additional nineteen (19) smelters until 2023.

2.3 Nickel Export Ban to Create Nickel Added Value.

Studies show that fully capable domestic nickel processing industry can create gross added value
almost four times per year compared to the export ban without efforts to develop a domestic nickel-based
downstream industry. This conclusion is being the core of Indonesia future plan for nickel industry. This
aim is already emphasize by the signing of regulation banning of export of unprocessed nickel and
bauxite ores since 2014. This regulation is also aligned with requirement contained in Indonesia’s 2009
Mining Law that the miners in Indonesia process their Nickel ores domestically and Article 33.3 of
Indonesia’s 1945 constitution, which states: "The land, the waters and the natural resources within shall
be under the powers of the State and shall be used to the greatest benefit of the people." A new regulation
issued by Ministry of Energy and Mineral Resources “PerMen ESDM NO. 11 Tahun 2019” was signed
and strengthening the policies, and ban Nickel ore exports effective date January 2020. The aim of this
export ban is crystal clear, to gain added value to Indonesia’s nickel commodities

2.4 Issues surrounding the establishment of downstream nickel industry

Knowing the importance of building domestic nickel processing industry, Indonesia’s

government seeks ways to implement the export bans once more. However, the down streaming of nickel
production of course requires a framework that is adaptive to the current market conditions to avoid a
repeat of the event (the halt of the previous nickel ore export ban due to the massive loss of revenue and
worsened by the unpreparedness of the down streaming sector ) in 2017. On the downstream side, only
21.13% of nickel ore is processed domestically into the base metal, while 74.29 % nickel ore is exported
directly in the form of raw materials. The details of nickel sales (as in 2012) are as follows, sales as base
metal amounted to 12.09%, nickel ore 6.27%, basic chemicals except for fertilizer 1.84%, basic iron and
steel 0.47%, plastic goods 0.45%, intermittent output 0.01%. 10 The downstream program is certainly
expected to increase the percentage of products that are converted into basic materials or complementary
materials for the last stage of industrial trees. The processing of nickel ore into FeNi or concentrate,
which is then processed into Ni-sulfate and Co-sulfate and in the final stage is processed into the basic
material for lithium-ion battery is an outline of the downstream initiative initiated by the government. 11
Learning from the implementation of nickel ore export ban regulations in 2013, several things
attributed to the failure of implementing restrictions on nickel ore trade in 2017, including the high cost of
production accompanied by falling commodity prices. 8 Nickel processing (smelter process) is a
production with high costs and low margins. 8 This is worsened by the poor investment climate in
Indonesia’s nickel mining sector. Costs such as costs for business licensing, land use leasing,
infrastructure development (roads, bridges, ports), procurement of capital goods, taxation, regulatory
uncertainty are still considered too high, causing the average cost of smelter production in Indonesia
higher than similar ventures by smelters operating in China. 11
One solution that has been put forward to lower production cost is by using a cluster system,
namely the application of an external economy-scale system, where clustering can be carried out for
smelters working in an operating area with the aim of reducing production costs originating from the
development and provision of infrastructure facilities such as power plants, ports, airports, worker
housing facilities, bridges, and highways. However, this clustering process requires support from the
government, especially for the provision of infrastructure licensing, as well as environmental
management to support the operation of these smelter clusters. 7,12

3. Analysis

The Indonesia Ministry of Industry has analyzed the benefits of the export prohibition of nickel.
The impact that is specifically analyzed is on creating gross value-added because it can directly reflect
national income creation, consisting of income from all production factors (wages and salaries, rent,
interest, remuneration for capital). Nickel produced from mining can be an input for other sectors that
surrounds. In other words, nickel ore numbers can encourage the creation of production activities
downstream. To illustrate the impact of controlling the export of nickel and copper raw materials, a
simulation of the impact of 5 scenarios was carried out, a hypothetical scenario and the current condition.
The five scenarios are15
1) A hypothetical condition in which Indonesia does not process raw materials at all. All raw materials
are exported. The only economic impact that is created is the upstream impact of the production of
mining materials.
2) The existing condition where most raw materials are exported and a small part are further processed
by the domestic downstream industry.
3) A hypothetical condition where the ban on raw materials' exported becomes effective, but the mining
producers have not changed their production patterns. On the downside, the domestic processing
industry is still underdeveloped. As a result, some of the previously exported production was unsold.
4) Hypothetical condition in which products by miners are partially unsold in condition 15 which
ultimately reduce production. Miners produce only to meet the needs of the domestic downstream
industry.
5) A hypothetical condition where the export ban is imposed on the conditions of a developed
Indonesian downstream industry. The domestic downstream industry can absorb all miners'
production.
 In the long term, Scenario-4 is still possible if there is no development of the domestic nickel-
based processing industry. However, assumed that the government is serious about developing a nickel-
based industry and/or this industry can attract investors, Scenario-5 is more likely to occur. The domestic
nickel processing industry (Scenario-5) can create gross added value almost four times per year compared
to the export ban without efforts to develop a domestic nickel-based downstream industry.(table x)

Table x. Simulation of Impact on Various Scenarios of Nickel Ore Export Restrictions. 15

N Condition Alocation Downstre Upstrea Total

o am m
1 Raw Material Export 100% export 2.086 0.000 2.086
0% domestic
2 Reality before full ban 74% export 2.086 0.352 2.438
24% domestic
3 Export ban, upstream industry is 0% export 2.086 0.352 2.438
not ready 26% domestic
74%
unabsorbed
4 Export ban, mine production 0% export 0.542 0.352 0.894
decreased 26% domestic
5 Export ban, upstream industry is 0% export 2.086 1.354 3.440
ready 100% domestic

Royalty for Nickel and its processed products reached Rp. 205 trillion, an increase of four times
compared to 2015 and tax revenue reaching Rp. 3.8 trillion. The resulting community development and
empowerment program was Rp 100 billion. One investment in the smelter base metal industry was
obtained for US$ 814 million. 15

Two months after the government announced the export ban in 2020; Indonesia immediately filed
a complaint with the International Trade Organization (WTO). The closure of the relaxation spigot, which
was decided to be two years earlier, is being sued by the European Union. Indonesia is accused of
fraudulently violating European stainless steel producers' access to ore raw materials. At the end of
January, represented by the Ministry of Foreign Affairs, Ministry of Industry, Ministry of Trade, and
Ministry of Energy and Mineral Resources of Indonesia, held an advanced questionnaire consultation
meeting in Geneva, Switzerland. The forum, held before the panel session, asked for information from the
Indonesian side regarding the export closure policy. Indonesia states that nickel exports are natural
because Indonesia has only consisted of exporting raw goods for decades. Now, Indonesia can process
itself to get added value. An export ban was also rolled out to guarantee investment in smelters that had
entered Indonesia. If nickel continues to be sold abroad, taking into account reserves, the supply of raw
materials will run out in no more than ten years. Based on the Ministry of Energy and Mineral Resources
data, the national nickel ore production reaches 60 million tons per year. 17

Dida, et al. (2018) analyzed the Virtue Dragon Nickel Industry's impact on the socio-economic
conditions of the community in Morosi Village, Southeast Sulawesi. Among the positive impacts is that
their farm products are sold directly to mining companies. These impacts can be seen from the average
income of farmers before the existence of mining of Rp. 2,110,471 and the existence of a mine of Rp
2,653,236. Considering this is a business opportunity in Morosi Village because many local people open
small businesses such as boarding houses, food stalls, and stalls. The opening of job opportunities for the
community with this mining company is because every employee recruitment is prioritized from Morosi
Village. 18 In the other hand, decreasing air quality can be seen due to company activities. The increasing
procurement of nickel smelter companies in terms of upstream and downstream is expected to improve
the socio-economic conditions from other sectors. Government programs implementations in terms of
stopping exports from making upstream and downstream sectors can increase long term improvements
also from the social economy by procuring better infrastructure. 18

4. Conclusion

Indonesia is a vast country with abundant natural resources such as oil, natural gas, coal, copper,
gold, agriculture produce such as rice, tea, palm oil, coffee, cacao, spices, etc. These commodities make
up most of the country’s exports. Trading partners include Asian countries including China, Singapore,
India, Malaysia, South Korea, Thailand, as well as distant continents such as the United States and
Europe.
A few years before, the European commission passed delegated regulation No. C (2019) 2055
final on High and Low ILUC risk criteria on biofuels. This is seen as a form of discrimination against
palm oil that contains of political motives and business competition especially for Indonesia. Indonesia
has responded to many counter measures against this policy, including implementing two strategies in
dealing with EU obstacles, namely the CPO (crude palm oil) “White Campaign” and nickel
protectionism.
Nickel is a chemical element with the symbol Ni and atomic number 28. It’s categorized as non-
renewable mining with limited resource in the world. This material is used in many specific industrial
and consumer products, including stainless steel, alnico magnets, coinage, rechargeable batteries, electric
guitar strings, microphone capsules, plating on plumbing fixtures. Nickel is recognizable due to some
advantages such as corrosion resistance metal, easy to mixed, easy to be recycled, has a magnetic
property, light and strong, and strategic commodity.
At present, world demand on Stainless Steel is still dominant and in 2040 global demand on
Nickel will increase more than 4 million tons (Wood Mackenzie). Government of Indonesia aims to use
this opportunity to drive and create added value of Nickel by processing it domestically. A new
regulation issued by Ministry of Energy and Mineral Resources “PerMen ESDM NO. 11 Tahun 2019”
was signed and strengthening the policies, and ban Nickel ore exports effective date January 2020. The
aim of this export ban is crystal clear, to gain added value to Indonesia’s nickel commodities. Positive
impacts seen from Morosi Village, Southeast Sulawesi where their farm products are sold directly to
mining companies which increases the revenue made. Another benefit include more business opportunity
as many local people open small businesses such as boarding houses, food stalls, etc. In the other hand,
environmental issues start to appear due to excessive company activities from building new smelters. 18
The mixed impacts caused by nickel export ban will always be in consideration for Indonesia in
the future. Coping with high demand, the nickel industry in Indonesia will surely be something to look
for.
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