Chinese firms plan to spend $8.6 billion on Indonesia smelters

(Reuters) - Chinese firms plan to invest $8.6 billion on aluminum and iron smelter projects in Indonesia, the industry minister said on Thursday, in a bid to guarantee supplies of metals under threat from a ban on exports of mineral ores from 2014.

Indonesia, a major supplier of metal ores to top consumer China, is trying to drive investment in the metal processing sector by imposing a 20 percent tax on raw ore exports ahead of an outright ban.

China is the largest consumer and producer of aluminum and Indonesia supplied almost 80 percent of the 25 million tonnes of bauxite it bought in the first half of the year. However, imports from Indonesia slumped in June in July, after the tax was imposed.

The planned investment appears to be the biggest to date by Chinese firms in Indonesia's metal processing sector, and if realized, would a success for the government's policy.

"The projects are forward moves in the metal refining industry in Indonesia," Industry Minister Mohamad Hidayat said after a signing ceremony attended by representatives of the three Chinese firms.

Hidayat named the companies as Beijing Shuang Zhong Li Investment Management Co, Ltd, Oriental Mining and Minerals Resources Co Ltd. and Rui Tong Investment Co Ltd.

Oriental Mining is an established steel producer but Chinese industry sources said they were not familiar with the other two companies.

SECURING SUPPLIES

Hidayat said Shuang Zhong Li planned to invest $7.1 billion to build an alumina refinery with a total production capacity of 1.8 million tonnes per year and an aluminum smelter with a total production capacity of 600,000 tonnes of aluminum ingot per year and a 1,250 MW power plant in West Kalimantan or Riau.

The other two firms plan to invest $1.5 billion on a direct reduced iron (DRI) plant with a total production capacity of 6 million tonnes per year in West Java, Hidayat added.

Both projects are to be carried out in stages, with the first completed by 2015 and the last by 2020.

Under the new Indonesian regulations, firms now have to submit plans to either build smelters or to process their ore locally, before being allowed to export raw ore from Indonesia.

Analysts said the decision to build smelters in Indonesia made sense for Chinese metal producers.

"Effectively they are losing a source of bauxite imports so you can replace it either by importing alumina from Australia, boosting bauxite imports from Guinea, or you can look at building some refineries in Indonesia," said Ivan Szpakowski, a metals analyst at Credit Suisse.

Chinese imports of bauxite from Indonesia fell 93 percent in July, while imports from Australia doubled, Chinese trade data shows. Chinese imports of iron ore in July fell 68 percent from Indonesia, and more than doubled from countries such as Chile, Mongolia and New Zealand.

Heng Kun, a senior analyst at China-based brokerage Essence Securities and who has been following the aluminum sector for years, expects more Chinese alumina producers to build smelters in Indonesia.

But like other analysts, Heng was cautious about the scale of these investments, especially in the current economic climate and as China's own growth slows.

"They have agreed the investment for now," he said, referring to the recent projects. "But how much the Chinese investor will put into these projects is hard to predict. They can say that they are having problems and cut the investment."

Earlier this month, industry sources said three of China's biggest alumina producers were planning to invest into bauxite mines and refineries in Indonesia.

One of these firms, Bosai Minerals Group Co Ltd, said on Thursday it had shortlisted an Indonesian partner for a $1 billion alumina plant on Bintan island which it expects to start production of 2 million tonnes per year by the start of 2015.

"We do not rule out building a smelting facility in Indonesia in the future. This alumina plant is the first step," said a Bosai Minerals spokesman.

The Indonesian Chamber of Commerce has said the country needs around 30 smelters to process various metals as part of a government drive to turn the country from an exporter of raw commodities into a manufacturing nation.

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