Indonesia is trying to revitalize its useful resource sector. President Jokowi Widodo has vowed to spice up the useful resource sector’s contribution to nationwide GDP by rising downstream actions. On this picture taken in October 2021, an excavator is loading up coal onto a dump truck at a coal mine operated by PT Khotai Makmur Insan Abadi in Kutai Kartanegara, East Kalimantan, Indonesia.
Dimas Ardian | Bloomberg | Getty Photos
Indonesia could also be wealthy in mineral assets, however its mining sector contributes solely a fraction to the nation’s economic system.
It is one thing the nation is trying to change.
The Southeast Asian nation boasts of pure deposits together with tin, nickel, cobalt and bauxite — a few of that are vital uncooked supplies for electrical car manufacturing.
Regardless of giant exports, the mineral and coal sector alone contributed solely 5% to Indonesia’s GDP in 2019, in line with the Extractive Industries Transparency Initiatives.
To spice up its economic system, Indonesia desires to maneuver away from exporting uncooked supplies, to focus as a substitute on growing its downstream industries.
Downstream actions contain processing uncooked supplies into completed merchandise to offer added worth. As an illustration, crude oil might be refined into petroleum, diesel and plastics.
President Jokowi Widodo has mentioned: “Indonesia at all times exports uncooked supplies, whereas it’s higher to course of and eat them by way of downstream business or domestically.”
As a part of that plan, Indonesia banned the export of nickel ore in January 2020, and the federal government has pledged to the steadily cease exporting different uncooked supplies too.
“I believe we are able to reap many advantages of stopping nickel ore export,” Widodo mentioned in late 2021. “Due to this fact, subsequent 12 months, we are going to cease uncooked supplies export for bauxite ore, and subsequent, gold and tin ores.”
The transfer downstream is anticipated to create jobs, enhance revenue margins for the sector, in addition to reduce down on carbon emissions.
“The affect is meant to be constructive, since value-added merchandise doubtlessly scale back coal mining firms’ monetary efficiency on the danger of coal worth volatility,” in line with William Simadiputra, analyst at DBS Group Analysis.
Going downstream additionally reduces publicity to fluctuating commodity costs and the reliance on imports.
Widodo has mentioned Indonesians will ultimately stand to profit.
“Subsequently, it is going to create jobs … it is going to generate tax revenue for the nation, and new enterprise alternatives, as an example, home firms that may export nickel ore,” the president mentioned.
Climbing up the worth chain
Indonesia has set its sights on three key sectors for downstreaming: the mining and mineral business, the coal and gasoline business, and the agroindustry.
In accordance with Indonesia’s Funding Coordinating Board, BKPM, the nation has the biggest nickel reserve on the planet and possesses 21 million tons of nickel.
Indonesia hopes to rework uncooked nickel into increased finish merchandise like lithium batteries for electrical automobiles — a transfer the funding board mentioned will ultimately carry financial development.
“The Authorities is engaged on analysis concerning lithium-ion battery improvements and it’s anticipated that inside two to 3 years forward we are able to produce lithium battery,” Widodo mentioned in late 2020.
Indonesia is the world’s fourth-largest coal producer, and the highest thermal coal exporter globally.
The Southeast Asian nation can also be making a push for downstream coal tasks, in line with Simadiputra, who mentioned coal mining firms obtain royalties from the federal government when such tasks succeed.
Coal mining is important for Indonesia, mentioned Wooden Mackenzie analyst Shirley Zhang.
“Not solely does it assist ease the present world power disaster, the nation — a key exporter of thermal coal — additionally advantages from the excessive seaborne coal costs,” she informed CNBC.
“It additionally ensures power safety for the nation’s home financial development.”
Indonesia’s coal manufacturing reached 564 million tonnes in 2020, in line with the IEA. The nation exported 405 million tonnes of coal in the identical interval — or 31.2 % of world’s coal exports that 12 months.
Thermal coal is a key driver of Indonesia’s economic system, Zhang mentioned, including that manufacturing, the nation’s largest GDP contributor at 26%, can also be pushed by coal energy.
Reducing reliance on LPG imports
Indonesia — the fourth largest LPG importer in Asia — plans to “scale back dependence on pricey LPG imports which took up Rupiah 50.6 trillion ($3.6 billion) in subsidies,” in line with S&P World.
As an illustration, Bukit Asam, an Indonesian state-owned coal miner, has initiated a $2.3 billion coal gasification venture with state power agency Pertamina and U.S. industrial fuel and chemical substances agency, Air Merchandise.
The venture is anticipated to soak up 6 million tonnes of coal and produce 1.4 million tonnes of dimethyl-ether (DME), a type of renewable gasoline that can be utilized to exchange diesel and propane.
This may assist scale back annual LPG imports by 1 million tonnes, in line with Simadiputra.
“Downstream actions will assist to detach Indonesia from power imports comparable to LPG. We count on decrease power imports to positively affect Indonesia’s commerce stability, particularly amid the present development of excessive power costs,” the analyst mentioned.
The Southeast Asian nation additionally stands to profit from the general development of fresh and renewable power too, mentioned Zhang from Wooden Mackenzie.
In actual fact, Indonesia has the potential to change into a pacesetter in decarbonization too, she added.
For instance, Indonesia might set up itself as a regional authority in decarbonization by demonstrating large-scale carbon seize utilization and storage, or CCUS — a expertise that captures carbon dioxide from industrial customers of fossil fuels and compresses it in order that it may be transported or saved for different makes use of.
“Indonesia can also be a key useful resource base for electrical car uncooked supplies comparable to nickel,” mentioned Zhang. “Its manufacturing outlook will drive the tempo and scale of decarbonizing the transportation sector internationally.”
Nonetheless, some challenges stay and should be addressed earlier than value-added downstream efforts might be ramped up, analysts mentioned.
As an illustration, dimethyl-ether is taken into account a brand new kind of biofuel with a small market, which makes it costly in comparison with fossil fuels.
“Help from the central authorities on changing current LPG with DME is essential, and it wants sturdy coordination between multi-stakeholders to make sure a easy transition forward,” in line with Simadiputra.
Bukit Asam’s partnership with Pertamina and Air Merchandise “is an efficient begin in our view,” he mentioned, stating that Pertamina is Indonesia’s largest LPG distributor.
Indonesia’s authorities plans to draw DME growth by way of some incentives, Vitality and Mineral Sources Minister Arifin Tasrif mentioned, in line with S&P World.
Zhang mentioned that authorities funding and insurance policies are wanted to make sure Indonesia’s useful resource sector is prepared for a carbon-free future. As an illustration, the federal government might present funding for upskilling and retraining in decarbonization applied sciences, she added.
However that is assuming the world continues to be on observe to fulfill its decarbonization targets of at the least 43% discount in greenhouse emissions by 2030, mentioned Zhang, who identified that power safety issues have surged because of the warfare in Ukraine which can derail plans to retire coal for good.
That is notably true for growing nations, as coal continues to be an affordable supply of power for them, she famous.