Indonesia's natural resources

Analysis of Indonesia’s natural resource potential is complicated by several factors. After Indonesia’s long heritage as a Dutch colony (and a source for cheap raw materials), its more attractive resources gradually took on global importance. Both massive supplies of rare hardwoods and important mineral deposits have made the country a key, but extremely vulnerable, participant in the global economy. Although all sections of the archipelago have some form of economically attractive resources, development is inevitably confronted with two obstacles: the high cost of necessary infrastructural improvements and the high cost of shipping over long distances to markets beyond Southeast or East Asia.

The Country

Indonesia is an archipelago of more than seventeen thousand islands, extending from the southeastern boundaries of the Indian Ocean in an arc leading to the South China Sea. Most of these islands are small and economically insignificant. In such cases local populations depend on mainly subsistence agriculture and animal husbandry. The country’s main islands, especially Sumatra, Java, Sulawesi (formerly Celebes), and Kalimantan (formerly Borneo), are characterized by volcanic peaks, generally rugged terrain broken by stretches of arable land, and extensive tropical forests. Each of the main islands possesses one or more major maritime ports linking it to the rest of the archipelago and to international shipping—a necessity for the development of Indonesia’s export markets.

Petroleum

Before Indonesia’s independence after World War II, Royal Dutch Shell dominated oil production in the country, with concessions on the three main islands of Java, Sumatra, and Kalimantan (then Borneo). Initial involvement of other foreign firms (most notably Caltex and Texaco) led to discovery of the Duri and Minas fields in Riau Province in Sumatra just before World War II. These fields became the most active areas of oil production in Indonesia in the postcolonial era, representing nearly one-half of the total production by the early 1960s.

By the late 1960s, the Indonesian government had begun exercising stringent control over concessions, undertaking production and marketing of Indonesian oil. The National Oil and natural gas Mining Company—also known as Pertamina, whose official name and bylaws would be altered several times into the twenty-first century—brought two earlier governmental entities under one roof and introduced profit-sharing arrangements with foreign contractors that were advantageous for Indonesian interests. Pertamina’s operations came to involve processing and marketing of a variety of petroleum products, including various petrochemicals. Boom conditions in the 1970s, combined with peak production of more than 600 million barrels in 1977, seemed to promise continuation of these advantages. Prices reached thirty-five dollars per and brought in about $15 billion annually by 1981.

However, changing conditions after the 1980s had negative effects on Indonesia’s oil sector. Price drops (to as low as ten dollars per barrel) followed by partial recoveries seemed to have induced Pertamina to push for maximum (some say wasteful) production—keeping output near 500 million barrels, even though total revenue intake fell to one-half of earlier figures. Attempts to keep the oil sector healthy seem to have only partially succeeded. Loosening contractual terms with foreign companies (a field of about twenty firms, mainly US registered) had the aim of encouraging investment to expand production to new areas (because only slightly more than one-half of sixty likely basins had been explored).

Even though estimates by Statista indicate that Indonesia probably had proved reserves of 2.41 billion barrels in 2023, the country’s place among oil producers has dropped considerably. Government policies after 2000, which included closing down marginally productive oil wells, did not lead to real improvement in the oil sector. Indonesia’s act of resorting to domestic subsidies of billions of dollars a year to keep gasoline and kerosene (for home heating and cooking fuel) prices down for Indonesian consumers has been criticized widely as an economic anomaly.

As the country continued to fail to invest in exploration in the oil sector and domestic energy demand increased, by 2009 Indonesia had suspended its membership in the Organization of the Petroleum Exporting Countries (OPEC); according to the Energy Information Administration (EIA), it had become a net importer of petroleum in 2004. By 2018, the country had rejoined and suspended its membership again over disagreements regarding oil production. As of 2022, Indonesia was not an OPEC member country. Data from the CIA indicated that Indonesia produced 2.48 billion barrels of crude oil per day in 2021.

Timber and Forest Products

The harvesting of timber from Indonesia’s extensive forests, many of which are classified as rainforests, represents the country’s second most important resource after oil. In the 1960s, estimates indicated that more than 80 percent of the land surface of the archipelago was forested. Extensive harvesting of timber for export has reduced that surface considerably—the World Bank estimated that the country had nearly a 50-percent forest area as of 2022. As a side effect, given the high rainfall in this tropical zone, serious soil has become widespread.

At various times in the second half of the twentieth century concessions were granted by the Indonesian government to ten private companies for the right to log more than 50 million hectares of forest (out of an estimated total surface of more than 120 million hectares). The giant island of Kalimantan (formerly Borneo) relies almost entirely on timber harvesting as the basis of its economy. Sumatra’s forests rank as the second most intense zone. Other potentially productive areas, such as the westernmost island of Irian Jaya (for many decades relatively immune to heavy logging), have been affected by the expanding logging industry.

Numerous controversies have arisen and continue to be debated, concerning not only questionable political favoritism in timber concession granting but also forest programs that have been initiated (with funding from timber concession royalties) to save Indonesia’s forests from depletion. Various measures are included in these programs, ranging from mandatory reforestation to “police” investigations of widespread instances of illegal logging. There is also a major ecological issue of widespread fires, many of which are caused by traditional tribal slash-and-burn methods of agriculture that have gotten out of control, but some of which are assumed to be illegal policies carried out by logging firms. Some ecologists suggest that the massive reduction of Indonesia’s forested area has already had the result of lowering the overall levels of humidity that are necessary to sustain certain species of tropical vegetation. However, reforestation projects are not without potential controversy. After some progress in controlling levels of from the late 1980s to 1997, figures rose alarmingly (to more than 3.5 million hectares per year in the last three years of the twentieth century). However, according to Indonesian Palm Oil in 2022, the country had reduced its deforestation rate by 64 percent, its highest decrease ever.

Indonesia derives a number of commercially valuable products from its forests. “Raw” logs for sawmill treatment constitute the largest category in terms of cubic meters processed. Between 2001 and 2006 processing of raw timber (qualities of which ranged from valuable hardwoods through more common varieties) more than doubled, from slightly more than 10 million cubic meters to nearly 25 million cubic meters. By 2022, the country had processed about 50 million cubic meters of raw timber. A number of other categories of commercially valuable processed wood products count almost as heavily, most notably high-quality plywood and composite (wood chip) building materials.

Despite this movement toward diversification of production in Indonesia’s timber industry, the world’s attention has been increasingly directed at issues relating to the country’s tropical rain-forest area and a number of endangered species—both animal and vegetal—whose future depends on Indonesian timber industry policy makers. Severe criticism has been leveled not only against the logging industry but also against what is viewed as an excessive consumer demand in developed countries for rare hardwoods, natural supplies of which are rapidly diminishing.

Copper

In 2024, according to Nasdaq, Inc. was one of the world’s top-ten producers of copper. However, this position is not a guaranteed source of economic potential. A lesson was learned when the price for copper reached a sixty-year low point in 1999, coming at a time when Indonesia was already in the midst of a major region-wide economic crisis (affecting mainly, but not only, Indonesia, Malaysia, and Thailand). The 1999 price of only $0.27 per kilogram recovered to $1.70 by 2006. While considerable flunctuation occurred between 2006 and 2009, except for sharp decreases in 2020 and 2020, the price per kilogram mostly increased in the 2010s and 2020s, reaching $1.80 by 2024.

Despite such trends, Indonesia may be able to capitalize on combining different sectors of its mining potential. For example, copper can be alloyed with nickel (another, less developed resource of Indonesia) to produce cupronickel (or commercial name Monel), which is highly resistant to corrosion and, thus, important for the modern shipbuilding industry.

Meanwhile, there is worldwide concern that, despite what sometimes looks like a copper “surplus”(especially when demand lessens, pushing prices down), the sudden reappearance of demand, and therefore expansion of mining efforts, could result in early depletion of reserves in countries like Indonesia.

Tin

According to the World Population Review in 2024, Indonesia remained high in the top ten countries producing tin in 2024. While its proven reserves are not as substantial as those of China, Malaysia, or Brazil, Indonesia fills almost as important a role as China and even more of a role than Malaysia as a producer of tin. Indonesia had an average annual yield from 70,000 to 80,000 metric tons. By 2021, Indonesia was responsible for 16 percent of the world's tin. In 2022, according to the SMM Information Technology, the largest producer of refined tin in Indonesia was Tianma, having 94 percent of the market.

Nickel

Indonesia continues to hold an important share of the world market for nickel. Nickel is highly resistant to corrosion and, therefore, has been used for generations either for nickel plating or as an in the manufacture of steel. Technological advances—a factor that may change the nature of demand and therefore global prices—have produced a particularly refined product, called nickel superalloy, used in the manufacture of jet-engine turbines and some spacecraft parts. Therefore, Indonesia has several reasons to be careful when considering its nickel industry. This need to calculate carefully was particularly clear following an apparent boom period in 2006–07, when nickel’s price reached more than $50,000 per metric ton and then dropped dramatically by early 2009 to $10,800 per metric ton. Indonesia has an interest, therefore, in calculating whether it should concentrate on producing high quantities of “ordinary” nickel (mainly for export to China) or experimenting with higher-priced alloys.

According to the Institute for Energy Economics and Financial Analysis, in 2023, Indonesia produced 51 percent of world's nickel, which was 1.5 billion tons. By 2024, observers had speculated that the market for nickel would significantly increase because of the production of electric vehicles, which require rechargeable batteries.

Bauxite

Indonesia has significant quantities of ore, and its production increased once more in 2017 when the government lifted a ban that included exporting bauxite. By 2024, Indonesia produced 927 million tons. In terms of relative costs of production, bauxite may offer attractive advantages to less technically developed countries like Indonesia, because the mineral is typically strip-mined close to the surface or under a ferruginous surface layer. However, the costly process involved in extracting aluminum from means that, unless Indonesia could someday reach the bulk volume of exports supplied by the top five world suppliers, it would have difficulty matching the economies of scale enjoyed by its competitors.

Another factor of increasing importance has to do with the success of aluminum recycling processes that have been adopted throughout the world. Although recycling does not hold out the prospect of reducing the price of aluminum itself, it can have the effect of reducing demand for bauxite, making Indonesia’s global position even more vulnerable.

Other Resources

In the first two years of the twenty-first century, Indonesia produced significant quantities of iron ore, a necessary component for producing another of its potentially significant exports: raw steel. In 2001, Indonesia produced more than 450 million metric tons of iron ore. The next year, production dropped off nearly 20 percent, and by 2005 the decrease appeared drastic, going as low as 19 million metric tons. By 2024, its iron ore production had dropped to 2.14 million metric tons. Significantly, production of steel, which began to slump in 2003, did not follow iron ore’s drop, possibly because of continued emphasis on steel production for the construction industry.

Indonesia does not rank among major producers of gypsum, in part because of its geographical uniqueness as an island country. The main producers for the global market are found in Spain and North America. Gypsum is a basic crystalline mineral used to make plasterboard, or drywall, and other basic construction materials. Thus, Indonesia’s production is mainly important as an import substitution resource.

Considerably rarer than ordinary gypsum is the more complex molecular form known as alabaster. Indonesia is attempting to produce sufficient quantities of alabaster to complement its list of “luxury” exports.

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