Bauxite: holding resources hostage will impede Indonesia’s growth

President Joko Widodo will soon run out of commodities to ban from export. Bauxite is his latest target. Indonesia has in the past threatened or imposed partial or full blocks on palm oil, coal and nickel. The moves win applause at home but erode credibility overseas.

The populism of the bauxite move was underscored by a Netflix-style teaser hours before the official announcement. Exports of an ore used to make aluminium and thus present in products from cars to cans are to stop from June.

Indonesia has the fifth‐biggest reserve of bauxite. The ban would put short-term upward pressure on the price of aluminium. This peaked at almost $4,000 per tonne in March and remains elevated at about $2,400. But the longer-term outlook is weak, reflecting a faltering world economy. Struggling China is the largest consumer.

Widodo is playing a dangerous game. Indonesia claimed palm oil export curbs ensured domestic supply. This policy at least had a direct and immediate goal. In the case of nickel, Widodo hopes the ban will force foreign companies to set up domestic processing plants, creating local jobs.

The investment proposition is unappealing. Indonesia lacks infrastructure and reliable legal protections for foreign owners. Financing factories would be costly.

The ban is more likely to benefit producers elsewhere, notably Rio Tinto and Alcoa, the world’s largest bauxite miners.

China’s reliance on Indonesian bauxite was much higher eight years ago, accounting for up to two-thirds of total imports. But a similar export ban prompted China to find alternative suppliers. Today, only a tenth of imports come from Indonesia.

There will be other uncomfortable consequences, judging from recent history. The rupiah plunged following Indonesia’s ban on palm oil exports and only started recovering when it was lifted. The World Trade Organization has meanwhile ruled that Indonesia’s ban on nickel ore exports violated international rules.

There is an equilibrium of benefits in the relationship between a resource-rich nation and customers. Indonesia’s repeated attempts to skew this are counterproductive.