Earlier this year, in an effort to promote downstream processing, Indonesia banned the export of mineral ores. As intended, the policy has expanded Indonesian processing activities. But it has also led to a drop in the export of metals, because refining and smelting capacity has not increased rapidly enough to make up for the fall in exports of unprocessed ores.
China accounts for nearly half of global refined minerals consumption and Indonesia had emerged as a major supplier. Chinese producers have responded both by trying to strike deals in Indonesia to get waivers on the export ban in return for promises to invest in processing facilities and by seeking alternative sources of supply. Cullen Hendrix, with whom I authored Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance, has written an interesting piece, Chinese Investment in Bauxite and Alumina: How Credible are Promises of Processing Development? , examining the global ramifications for the bauxite and alumina markets.
Hendrix examines three Chinese supply alternatives to Indonesia: Vietnam, Guinea, and Jamaica. But like the Indonesians, they too would like to expand downstream processing activities. Of the three, Guinea has by far the largest bauxite reserves, almost ten times those of Jamaica and 100 times those of Vietnam. But the refining of bauxite into aluminum oxide or alumina and the subsequent smelting of alumina for use in consumer and industrial applications is extraordinarily energy-intensive. Aluminum is sometimes called "liquid electricity," and the viability of processing activities depends in large part on the cost and availability of energy supplies. As a consequence, smelters are often located in countries, such as United Arab Emirates or Russia, where energy is plentiful (or at least energy prices are low) rather than countries with abundant ores.
In terms of existing energy capacity, adjusting for the size of the economy, Vietnam has roughly twice the electrical generating capacity of Guinea or Jamaica, suggesting that it might be a more suitable site for an integrated mining and processing industry. Moreover, while Vietnam has some coal and gas, Guinea and Jamaica are both entirely dependent on hydrocarbon imports, and Jamaica's electricity costs are among the highest in the world.
Political economy considerations could come into play as well. As Hendrix and I argued in our book, while China may subscribe to noninterference in the domestic affairs of other countries, the reverse does not necessarily hold: As a major investor in extractives, Chinese producers have become the target of local political ire in emerging democracies such as Zambia and Ghana. Jamaica is a democracy with a lively free press. Guinea is in the midst of a democratic transition. Vietnam remains under the control of the communist party. Advantage Vietnam.
Likewise, Chinese producers appear to have a proclivity to invest in corrupt environments, either because of greater experience in dealing with such environments at home or because Western competitors are under greater legal scrutiny for their actions abroad through mechanisms such as the Foreign Corrupt Practices Act or the Extractive Industries Transparency Initiative.
So from a political economy standpoint, again Vietnam would seem a more likely location for Chinese investment than either Jamaica or Guinea, though diplomatic relations between China and Vietnam are tense, because of disputed territorial claims in the South China Sea.
In short, the Indonesian export ban has reverberated across the globe, with Chinese producers looking to Asia, Africa, and the Caribbean for new sources of supply. Of the three sources of supply examined, setting aside diplomatic tensions, Vietnam presents the strongest case as a potential host of an integrated industry. For China, choosing Guinea and Jamaica as the location for commercially viable processing facilities—processing plants that can operate without significant public subsidy—is questionable at best. Host governments considering deals like the ones proffered in Indonesia—future investment in processing in exchange for ore exports now—should evaluate the credibility of those promises carefully.