Bareksa.com - When Indonesia vowed to halt exports of mineral ore to wring more profit from its rich resources, many predicted the policy would be an economic own-goal.

But in the case of nickel, at least, Indonesia is proving its doubters wrong as the price of the metal soars and Chinese producers starved of raw material begin to ship equipment for processing plants to the Southeast Asian nation.

Just four months after a ban on ore exports, one smelter is under construction and equipment for two others has been shipped from China to Indonesia, including a dismantled blast furnace, industry sources told Reuters.

At least two other firms plan to start construction of processing plants by year-end or shortly after, amid fears that China's nickel-pig iron industry is running out of raw material.

"It's been a success," Energy and Mineral Resources Minister Jero Wacik told Reuters.

One Chinese firm that told Reuters it expected to start production by year-end at the earliest said the smelter would produce nickel pig iron with 4 percent metal content, which then would be shipped back to China for production of higher value grades with 10-15 percent metal.

Analysts say new plants on the drawing board mean Indonesia's nickel production could triple by end-2016, with investors starting to believe that Jakarta will hold the line on its ban despite past policy flip-flops.

Indonesia, the world's biggest nickel ore exporter before the ban, has traditionally shipped thousands of tonnes of ore to customers such as China, who turn it into alloys such as nickel pig iron, a key ingredient in stainless steel.

January's ban on nickel ore exports aimed to create a local processing industry, with Jakarta effectively foregoing $1.5 billion of ore shipments a year to move up the value chain.

Early market reaction was muted as traders eyed large stockpiles built up in China and Japan and raised doubts that Indonesia would stick to its plan. But nickel prices have since shot up as much as 50 percent as nickel pig iron and ferro-nickel producers fretted about longer-term shortages.

"I think people are starting to believe that the ban will stick in place," said Andrew Mitchell, principal nickel analyst for Wood Mackenzie in London

PRICE IMPACT

The surge in nickel prices has benefited nickel producers worldwide, but is also helping to cushion the impact of the ore ban on Indonesia's export earnings.

Increased earnings for local producers PT Vale Indonesia and PT Aneka Tambang (Antam), who already operate nickel refineries, could offset about half of the lost export revenue from nickel ore exports, says Macquarie.

At current prices, it estimates Indonesia will recover roughly half of the $1.5 billion it earned last year from sales of 585,000 tonnes of nickel in ore, but for less than a quarter of the same reserves.

"If they persist with the ban, the nickel price could hit 30,000 a tonne," said Macquarie's Jim Lennon in London. "It always was a smart idea - the trick was to get people to invest."

Indonesia says three nickel pig iron plants have been registered for exports, but has not given details, with several more expected to be completed by the end of the year.

"Nickel prices now are how much, $21,000? At the end of last year they were still $13,000. So, build those smelters quickly," Coal and Minerals Director General Sukhyar told reporters last week.

UNDER CONSTRUCTION

At the vanguard, Sulawesi Mining Investment, a joint venture between China's second largest stainless steel company Tsingshan and Indonesia's PT Bintang Delapan Group, is building what will be one of the biggest plants in the country, having starting planning after Jakarta first flagged the new rule in 2009.

The project, partly funded by a $384 million loan from China's policy lender State Development Bank, will produce 300,000 tonnes of ferro-nickel in Indonesia's Morowali county.

Minerals consultancy CRU estimates there will be six or seven plants under construction by the end of 2014 and is following 20 projects, with most expected to be smaller blast furnace type operations, said Beijing-based analyst Peter Peng.

Many of the planned smelters will pair local Indonesian firms with Chinese backers.

"Everybody had thought these NPI projects would take a fair amount of time but it looks like some of them may be built faster than expected and at least one or two should be ready next year," said Shanghai-based Citi analyst Ivan Szpakowski.

A second firm, China Hanking Holdings, said it has shipped some equipment to Indonesia for a planned smelter and hopes to win a nickel ore export licence once Indonesia authorities see its smelter plans are serious.

"We haven't started the commencement of any construction yet," a spokesman said. "The reason why we're shipping equipment there is to show the government we are really sincerely looking forward to cooperating with them."

A third firm, Ibris Nickel expects to partner with a Chinese firm to build a plant, with the first phase of production scheduled for the second half of 2015, two sources said.

Consultancy Wood MacKenzie expects about 16,500 tonnes of processing capacity to be completed this year climbing to 190,000 tonnes of nickel capacity by the end of 2016.

This would add to 100,000 tonnes of sales expected by existing producers at the end of this year, although Mitchell cautioned it was "very difficult to really be certain exactly what the actual stage of development is."

But Indonesia's actions had the full support of traders and nickel miners, forty percent of whom were losing money six months ago, analysts said.

"The bottom line is, if it is reversed, it's game over for nickel and for investments in smelters in Indonesia," Mitchell said. (Source : Reuters)