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Why Indonesia Plans to Ban Bauxite Exports in 2023

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Why Indonesia Plans to Ban Bauxite Exports in 2023

The move is in line with Jakarta’s increasingly aggressive use of export bans in pursuit of domestic economic goals.

Why Indonesia Plans to Ban Bauxite Exports in 2023
Credit: Depositphotos

As reported by Reuters, Indonesian President Joko “Jokowi” Widodo recently announced that in June of this year his country will ban exports of bauxite. Bauxite is an important input in many industrial products including aluminum, cement, and various chemicals. The goal of the ban is to ensure that bauxite mined in Indonesia is used as an input in domestic industrial activities, rather than being exported and having the value added in other countries.

This move is in line with Indonesia’s increasingly aggressive use of export bans to achieve domestic economic goals. Last year we saw the government temporarily ban coal and palm oil exports to stave off domestic shortages amid high global commodity prices. And the state has been relatively successful in using export bans on unprocessed nickel ore to accelerate investment in higher value added downstream activities such as smelting.

The bauxite export ban is clearly being modeled on the nickel ore export ban. Indonesia has large state-owned companies that are major players in the domestic aluminum and cement industries. No doubt the goal of banning bauxite exports is to force more investment into higher value added industrial activities that can be performed by these and other domestic companies.

But there is reason to question whether Indonesia can treat bauxite in the same way it has treated nickel and expect similar results. Indonesia has much less market power when it comes to bauxite. According to the United States Geological Survey (USGS), as of 2021 Indonesia holds only 3.75 percent of global bauxite reserves, and accounted for only 4.6 percent of global production. In 2020, by comparison, Indonesia accounted for about 30 percent of global nickel production. The USGS also notes that “the United States and most other major aluminum-producing countries have essentially inexhaustible subeconomic resources of aluminum in materials other than bauxite.”

This would seem to limit Indonesia’s ability to use bauxite export bans as a means of inducing investment in domestic industrial activities like aluminum smelting. For one thing, at least according to the USGS, bauxite is more easily substitutable. More importantly, given that countries like Australia and China are responsible for a larger share of global production, Indonesia’s ability to capture investment by unilaterally banning bauxite exports is circumscribed. Buyers of Indonesian bauxite can simply turn to Australia, or other large global suppliers, rather than be forced to invest in Indonesian processing facilities.

The government has been telegraphing that they want to use export bans more aggressively in coming years, in order to turn their control over raw commodities into higher value added economic activities. It is an understandable impulse, and this type of economic nationalism has been on the rise throughout the region and the world in general. But an export ban ought to be based on some kind of larger economic logic or strategic thinking.

There was a pretty clear logic involved when Indonesia banned the export of coal, palm oil, and nickel ore. Because it controls a large share of the global production of these commodities, the government can demand certain things, like investment in higher value added domestic manufacturing or industrial activities. In other words, the state has leverage to intervene in markets and try to force them to serve the national interest. But with less than 5 percent of global bauxite production, it is less clear that the state has the same kind of leverage and will be able to bend markets to its will in the same way.