Downstreaming Natural Resources
The downstreaming of natural resources is an effort to increase the added value of natural resources through the processing activities of the manufacturing industry.
The downstreaming of natural resources is an effort to increase the added value of natural resources through the processing activities of the manufacturing industry.
The value chain starts from the provision of raw materials from the agriculture, plantation, fisheries and mining sectors and involves processing them into finished goods. Oil palm is processed into palm oil, cooking oil, butter, fatty acids, or other derivative products.
Bauxite ore is processed into alumina, aluminum, aluminum sheets, cans and other derivatives, while natural gas can be turned into ammonia, fertilizer and many other derivatives such as plastic and textile materials.
Commodities derived from natural resources or even basic industrial products, such as metals and palm oil are vulnerable to price fluctuations. Processed products can fetch higher prices but are more vulnerable to changes in prices in the market. For example, cooking oil and butter are three to four times more expensive than crude palm oil. Their prices are also higher and tend to increase further.
Countries that rely on commodity production and commodity exports such as agricultural and mineral products often find it difficult to predict their state revenues, which could hamper economic growth.
Commodity prices are very much controlled by the world market, while the prices of downstream products, especially finished goods, are very much determined by the demand of consumers.
There are several factors that control commodity market prices such as global economic growth and the emergence of new economic powers such as China, which need a great amount of raw materials, greatly influencing the supply and demand of the commodities.
The more efficient use of raw materials by industrial countries and the finding of new technologies can reduce the function of certain types of commodities. For example, palm oil has to compete with other commodities such soybean and sunflower oils. The activities of traders in financial markets such as the future trading practice can also affect commodity prices.
Indonesia has a variety of sources of natural products such as such as palm, rubber, cocoa, coffee and fish, as well as petroleum, natural gas, minerals and coal. Some types of natural resources have become icons of Indonesian exports, such as palm oil. Indonesia is the top, second and third largest exporter of palm, rubber and cacao, respectively, in the world.
Some types of natural resources such as wood, palm oil, ore nickel and tin have comparative advantages. The other advantage of the country is its domestic market, which is the largest in Asia after China. This makes Indonesia the main market target of countries in the region.
With its large domestic market, Indonesia has a wide opportunity to locally process its natural resources by building a consumer-oriented industry, and it could become a very competitive industry.
Contradiction
The program to establish a downstream industry for natural resources is not new at all. In 1985, Indonesia began to ban the export of unprocessed timber. The measure led to the entry of foreign investment. As a result, the number of plywood factories increased sharply to 110 from 22 in five years, and it even threatened the timber industries in other countries.
In the mining industry, holders of contracts of work are banned from exporting raw mineral products. All should be first processed in the country before being exported as stated in the 2009 Mining Law on minerals and coal, which requires the improvement of the added value of the mineral products. In other words, the regulation prohibits the export of raw mineral products.
The export ban of natural resources is more broadly stipulated in Industrial Law No. 3/2014. Before the ban on the export of raw minerals was imposed in 2014, nickel production totaled only 90,000 tons. This total number was achieved in more than 30 years. Currently, nickel production has reached a total of 280,000 tons, meaning an additional 190,000 tons of nickel production has been added in just five years. In fact, in 2017, the first stainless steel factory was established.
Similarly, smelters for alumina, the raw material for aluminum production, have been built. The value of processed products is five to six times higher than in raw form. Research into the processing of minerals continues to grow in various research institutions and universities as well as in the private sector.
Unfortunately, the government reopened the export taps, causing Indonesia to lose US$1 billion of its share in the global nickel market in 2017 and 2018. The supply of raw materials from Indonesia has led to the increase in nickel production in China by about 25 percent by the end of 2018. Mining companies are reluctant to build smelters for fear of disruptions to the supply of raw materials.
Nickel is not only used for steel production, but is also used as a raw material for battery production. The export policy is very contradictory given the government’s plan to develop the electric car industry, which requires nickel and cobalt for battery production. At least Indonesia can adopt a strategic position in the global market, becoming a production center for such raw materials, which are now badly needed by battery and electric car producers in many countries.
Future challenges
The main contributor to gross domestic product (GDP) outside the oil, gas and mining sector is the food and beverage sector, especially palm oil derivatives and products of other agricultural commodities. Their contribution to GDP exceeds that of the oil and gas sector. Our ability to process natural resources has also significantly increased the contribution of the manufacturing industry to GDP, reaching 20.2 percent in 2017, with a growth of 4 percent. About 70 percent of Indonesia’s exports consist of processed products.
The challenge is that despite the large contribution of processed products to total exports, most raw materials are still imported, like the raw materials and machinery for the automotive, electronics, base metal, chemical and textile industries. Thus, it is clear that the government’s current challenge is to replace imported raw materials and capital goods as well as to increase exports and investment. If Indonesia wants to achieve its target to improve its ranking in the G-20 to 10th from 16th at present, the contribution of the processing industry in GDP should reach 25 percent.
What should be done by Indonesia, now and in the future? First, it must strengthen its policy on the utilization of natural resources such as agricultural products, minerals and natural gas in the government’s national strategic industry plan (RIPIN), which details stages in the development of downstream industries.
Second, the types of natural resources that have comparative advantages such as palm oil and nickel must be developed through prime industries in their value added chains, including building industry capital goods and services.
The prime strategic industry, like the bioenergy industry with the production of the increasingly in demand 100 percent biodiesel, should become a priority of the government. In the development of the energy industry, such as geothermal and natural gas production, the capital goods should be built in Indonesia. Third, there is a need to develop basic and secondary industries to produce raw materials for industries such as automotive and textile producers producing finished goods that are in very high demand. Fourth, increase the added value of prime natural resource commodities other than palm oil such as rubber, and place it as part of the global value chain. Fifth, government policy on vocational training is timely and should be continued so it can produce a skilled workforce suited to the processing of natural resources.
The strengthening of technology and innovation in the processing industry is needed. The introduction of Industry 4.0 in the food, textile, electronics, automotive and chemical sectors to increase productivity, as the government has announced, needs to be supported and realized. No less important is the use of digital technology, not only in the manufacturing sector, but also in the natural resource sector such as the application of smart technologies including smart farming, smart mining and smart fishing.
The development of the downstream industry is also in line with the mandate of the 1945 Constitution that the state must continue to improve its economic and social benefits from natural resources.
The augmentation of the downstream industry also requires us to be grateful for the gifts we receive from the Almighty, which can make us a dignified nation.
Sukhyar, Expert staff member of the Industry Ministry