Companies have reported that acquiring loans to build smelters has become increasingly challenging as financial institutions and investors now require such projects to be powered by clean energy, putting the country’s drive for downstream industry development at risk.
Coal-fired power plants made up more than half of the 4,204 megawatts of energy demand needed by the mineral ore smelting industry, followed by gas and diesel, according to an Energy and Mineral Resources (ESDM) Ministry estimate in 2019.
A Rizqi Darsono, who heads the permanent committee of coal and mineral resources at the Indonesian Chamber of Commerce and Industry (Kadin), said coal had remained one of the most abundant sources of energy miners could use to power their smelters, while banks have become increasingly selective in financing coal-related projects, including those electrified by coal-based power plants.
The requirement to drop coal is burdensome for miners, he said, as Indonesia has yet to build an adequate electricity grid powered by renewable energy.
ESDM Ministry data show renewables only comprised 13 percent of installed capacity in Indonesian electricity, which would only rise to a third of total installed capacity by 2030, indicating a slow transition to renewable energy.
“We want to find funding [for our smelters], but acquiring it is difficult if the [energy source] is a steam power plant,” Rizqi told The Jakarta Post on June 29, adding that in a normal situation, their smelting business already struggled to access financing for being considered high risk.
Indonesia is pushing to downstream and process more natural and mineral resources onshore in a bid to take off from its commodity-based economy, which mostly involves plowing the earth and exporting its content directly.
President Joko “Jokowi” Widodo has made it clear on multiple occasions that he would soon ban exports of raw materials and only allow goods to be sent overseas in the form of semi-finished or finished products.
The government has banned nickel ore exports since 2020. Shipment bans on tin ingot and washed bauxite will take effect by the end of this year and in June 2023, respectively.
Rizqi went on to say that bauxite producers had been voicing their concerns over the financing difficulties, especially as the export ban was drawing near.
The energy ministry has recorded that at least 53 smelter construction projects are in process, with 30 bauxite smelters and 12 nickel smelters scheduled to be constructed or operational by 2025.
Ahmad Zuhdi Dwi Kusuma, mining industry analyst at state-owned lender Bank Mandiri warned that financing difficulties could hamper smelters from growing in number, adding that it could disrupt the government’s ambitions to downstream mining industries.
At worst, it could halt the production and exports of particular refined mineral products, risking billions of rupiah in revenue and foreign exchange, which the country could still gather if it exports in raw form.
Other worst-case scenarios include plummeting domestic prices for a particular mineral, he said, pointing to a 2020 fiasco when domestic nickel prices fell and hurt local miners, as there were not enough smelters to absorb excess domestic production following the export ban.
“The government should accelerate the development of renewables to power downstream industries by giving incentives, tax exemptions and other policies,” said Ahmad.
Aviliani, an economist who also heads the research and banking development department at the Federation of Domestic Banks (Perbanas) said on Monday that banks were anticipating the growing trend of an environmentally conscious economy, which would soon exempt imported goods and products from producers relying on fossil fuels.
She said fossil fuel consumption had been interpreted as one of many forms of credit risk, which drove banks to become more cautious in disbursing loans.
“What if the loan has been disbursed but no one wants to buy [the products]? Therefore, many banks prefer to finance companies or projects that have adopted renewables,” Aviliani told the Post, adding that nowadays banks were competing to acquire customers who met the high environmental standards.
Another problem, she said, was the Financial Services Authority’s (OJK) regulation that mandates banks to put environmental consideration into loan disbursements.
