The Only Miner This Export Ban Won't Crush

Like squeezing a balloon tightly in your hand, government policy addressing one problem usually has the effect of causing a new problem to pop out somewhere. Indonesia's mining industry is a case in point.

Seeking to boost its domestic resource processing industry, the government mandated that all miners process their mineral ore in-country beginning Jan. 1 or face an export ban on all of their output. But with insufficient infrastructure in place to comply with the directive the entire mining industry, from Freeport-McMoRan's (NYSE: FCX  ) massive Grasberg copper and gold complex to Newmont Mining's (NYSE: NEM  ) equally large copper project at Batu Hijau, will come to a grinding halt if the government doesn't relax its decree.

Freeport only processes about 40% of its ore domestically, and though it has two smelters being built that are expected to go online in 2015, the Indonesian parliament refuses to give it an exemption -- meaning the company might end up cutting production by 60% next year while laying off 30,000 employees.

Newmont produced 76 million pounds of copper last year at Batu Hijau; though it anticipated producing between 75 and 90 million pounds this year, only 20%-23% of the copper concentrate is processed at Indonesia's sole copper smelter, PT Smelting in East Java. The miner has begun making contingency plans should its own negotiations with the government fall through.

Most observers expect the industry to collapse if the law remains unchanged as Indonesia is the world's largest exporter of nickel ore, thermal coal, and refined tin. Yet miners contend that not all of the ores exported are worthy of having their own smelter. Nickel, for example, has fallen from about $8 per pound a year ago to $6.35 per pound today, a 20% decline brought about as global supply outpaces demand and slower economic growth has cast a shadow on its longer-term growth. Morgan Stanley doesn't expect the metal to recover before 2015 so building a new smelter would not make economic sense.

And that suits Vale (NYSE: VALE  )  just fine. As the world's second-largest nickel producer, it operates a smelter in Soroako and says it shouldn't be affected at all by the rules. It is increasing its capacity from 70,000 tonnes per year to 80,000, with plans for a further boost up to 120,000 tonnes in the future. It anticipates seeing nickel prices rise next year if Indonesia stands firm on its export ban, as the nation accounts for roughly 28% of global supply.

While the parliament is so far sticking to its guns because its profligate spending has created a large deficit that must be filled, many analysts believe the ban won't stay in its current form. Morgan Stanley projects full implementation likely won't happen before 2017.

That ought to give enough time for the miners to get their planned processing facilities operational and head off the industry's collapse. It wouldn't make sense for the government to make an already untenable situation worse, but then there wouldn't be a law of unintended consequences if governments always acted logically -- and Vale wouldn't be poised to capitalize on the balloon that's about to be popped.

Government policy changes, the value of these investments won't
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