Market Report, "Indonesia Mining Report Q2 2016", published

Indonesia's mineral production growth will remain slow on the back of heightened environmental protection, slowdown in the Chinese economy and continued mineral price weakness. The impending ban moderation on the export of mineral ores will provide some respite to production, especially in the case of bauxite.

Latest Developments & Structural Trends

We expect the Indonesian government will push ahead with its February 2016 proposal to revise the country's mineral ore export ban by September 2016 as expected investment in the downstream sector has not materialised. The bauxite sector will benefit most from the relaxation of the ban, as the sector registered poor smelter construction and the greatest loss in revenues as a result of the ban. We expect our current production forecasts to face upside risks due to the impending ban moderation.

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We forecast bauxite production growth in Indonesia to register an annual average of 148.2% during 2016-2020, mainly because of acceleration in production in 2016 of 600% due to China Hongqiao Group Limited's smelter facility coming online. Hongqiao will initially produce one million tonnes per annum of aluminium, doubling capacity by 2017. One tonne of aluminium requires approximately five tonnes of bauxite to produce. Contrary to numerous smelter project proposals in 2014 and our past expectations on high smelter investment from China, smelter investment for bauxite has been stagnant as a result of low prices and lack of funding. In March 2016 Hongqiao started trial runs in its new alumina smelter in Indonesia, adding to the only other smelter in the country, PT Indonesia Chemical Alumina, a subsidiary of diversified local miner PT Antam.

We expect Indonesia's coal production to fall by 15.0% to 314 million tonnes (mnt) in 2016, followed by subdued growth henceforth to 2020, registering an average annual growth of 3.0% per annum during 2016-2020. Over the long term, despite the one time fall in domestic production due to the crackdown on illegal mining in 2015, we believe output will be supported by strong demand from a domestic pipeline of coal-fired power plants and continued import demand from Asia. Emerging economies including China and India will continue to rely on coal for power generation over the next decade. We expect domestic shortfalls in these countries to increase dependency on coal imports.

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