Headwinds for Indonesia's commodity exports loom

Depressed commodity prices and policy headwinds will weigh on exports in the immediate term, says DBS.

DBS Group Research noted:

Commodity prices have not been favorable for the past several quarters. Coal prices have dropped by around 30% since 1Q11, similarly, palm oil prices are down by around 16%. Meanwhile, the broader CRB index is down by 20%. This has a large impact for a net commodity exporter (where commodities make up around 50% of exports) like Indonesia.

In fact, the non-oil commodity trade balance has narrowed from a peak of USD 8.7bn in May 2011 to USD 6.8bn in April 2012 as price effects drove non-oil commodity exports down from USD 9.0bn to USD 7.7bn over the same time period. Had commodity prices been 10% higher, the country could have avoided the trade deficits registered in April and May.

Policy changes also play a part. Although it is the world’s third largest exporter of natural gas, the government allowed private firms to import liquefied natural gas in mid-2011 to cope with the country’s rising energy needs. Gas imports have risen by 180% from Jan-May compared to the same period last year.

For the longer term, state-owned oil and gas firm PT Pertamina is expected to ramp up imports in 2013. Seven LNG terminals will be built in eastern Indonesia (scheduled to be in operation from 2014-2015) to facilitate gas imports.

In May, the government also banned the export of 14 metal ores including copper, lead, nickel, bauxite and gold. This forms part of a plan to stop all ore shipments by 2014 and move processing capabilities onshore. A local mining industry body noted that this policy could cost the export industry some USD 164mn a month in bauxite and nickel revenue.

In short, there are considerable policy headwinds for commodity exports in the immediate term and still-depressed commodity prices are not helping. However, once commodity prices have a turnaround, an improvement in the trade balance would quickly follow.