Global Economics

Indonesia's Riches Draw China, India


The archipelago is pulling in big investments in energy and commodities, with Jakarta pushing for more local production and job creation

When it comes to energy and industrial commodities, China and India are Asia's fiercest competitors. For the last couple of years, both Chinese and Indian companies have done deals across the globe—from Latin America to Africa— to win oil exploration rights or secure long-term raw material contracts.

Now they have set their sights on resource-rich Indonesia, and President Susilo Bambang Yudhoyono's government is rolling out the welcome mat given the country's push to attract the kind of foreign investment it needs to spur fresh exploration and mining projects that will secure this sprawling Southeast Asian archipelago's economic prosperity.

The deal-making of late has been fast and furious, and the activity is driving up the value of Indonesia commodities. And the merger and acquisition wave led by such corporate giants as India's Tata Group, PetroChina (PTR), and China National Offshore Oil Corporation, known as CNOOC, is not likely to cool off soon. "For China and India, Indonesia is the next Australia," says Sofjan Wanandi, founder of Indonesian industrial conglomerate Gemala Group.

Nice Numbers

For a middle-sized economy such as Indonesia's, supplying and prospering from bigger and dominant Asian economies like India and China makes more sense than trying to compete head-on with these emerging giants. Indonesia Trade Minister Mari Pangestu has said she wants Indonesia positioned to ride the powerful economic growth wave being generated by these two countries.

The strategy makes sense, given the country's big endowment in energy and commodity assets. It is sitting on top of estimated proven reserves of 9 billion barrels of oil, 9.3 billion tons of coal, and 180 trillion cu. ft. of natural gas. It's the world's second largest producer of copper and tin and No. 4 in the production of nickel.

In fact, the world's largest copper and gold mine, run by Freeport McMoRan (FCX), is in the Indonesian province of Papua, located on the western half of the island of New Guinea. Indonesia is a major producer of palm oil, cocoa, and coffee. No surprise that both its stock market in Jakarta and overall economy closely track the ups and downs of global commodity markets.

Slow to Develop

Last year the commodity price boom drove 5.6% economic growth and a 55% runup in stock prices, one of the best performances in Asia. On the flip side, Indonesian stocks were hammered on Jan. 10 because of declining oil prices and a downturn in copper prices.

Although it's resource-rich, Indonesia still isn't growing at its full economic potential, because unlike Russia and Brazil, it has been slow to develop its vast natural resource base. Government corruption, a shoddy legal system, powerful local governments, and poor infrastructure have scared off some foreign investors, though India and Chinese companies have a greater tolerance for such obstacles. "The problem has been exploration and development of the resources," says Arjuna Mahendran, a strategist for Credit Suisse in Singapore.

Fresh investment has tended to gravitate toward existing mining operations rather than to exploration or new energy fields. "Until recently, nobody was investing to find new reserves," says Tom Lembong, a director of PT Farindo, the local arm of the giant U.S. private equity group, Farallon Capital.

The investment group also has a stake in PT Adaro, Indonesia's second-largest coal producer. "It is important that Indonesia exploit its natural resources more rapidly," says Mahendran.

Biggest Overseas Venture

That's where Indian and Chinese companies come in, or so the theory goes. In a major bet on the future of green energy, CNOOC on Jan. 9 said it would team up with PT Smart, a palm oil producer and a Hong Kong energy company, to invest $5.5 billion in producing bio-fuel in Indonesia. The idea is to make new fuels derived from palm oil and sugarcane in regions such as Papua and Kalimantan.

If completed, that would be CNOOC's biggest overseas venture and a bigger financial bet than its well-publicized, $4.2 billion takeover last year of Central Asian oil concern PetroKazakhstan. It would also breathe new life into the energy industry of Indonesia, an OPEC member now a net importer of oil because of lagging exploration and smuggling problems.

CNOOC, of course, is already a big investor in Indonesia's oil sector, with a number of exploration and production contracts. (In all, Chinese companies have invested nearly $6 billion, primarily in Indonesia's resource sector.) On top of that, rivals PetroChina and China PetroChemical, known better as Sinopec, have been trying to acquire more exploration rights and invest in refining ventures.

Talking the Talk

Already, Indonesia is the No. 2 investment destination after Australia for Chinese investment in energy and commodities. Last decade, U.S. and Japanese companies threw around the serious money, but now, "China is emerging one of the biggest new investors in Indonesia," says Fauzi Ichsan, economist for Standard Chartered in Jakarta.

The other, of course, is India. Diversified conglomerate Tata Group is in talks, according to news reports, on spending $1 billion for a strategic stake in local companies such as PT Arutmin Indonesia and PT Kaltim Prima Coal.

Tata needs coal for its various power plants and steel ventures. That's important, given that Tata Steel is bidding about $10 billion to buy Dutch-Anglo steelmaker Corus Group (see BusinessWeek.com, 1/3/06, "Tata Far From Folding in Corus Bid").

The two units' parent company—PT Bumi Resources—held serious talks last year to sell another unit called IndoCoal Resources to an affiliate of U.S.-based Renaissance Capital for $3.2 billion, though the deal fell through.

Leveraging Their Position

Jakarta isn't interested in just selling off its national resources for quick cash gains. The government wants foreign investors to commit to major local production deals that will create wealth and jobs inside the country. Legislation is being considered to require mining companies to process ore into metal products in Indonesia, rather than simply exporting raw materials overseas.

President Yudhoyono hopes foreign investment will bankroll the construction of new Indonesia copper smelters and nickel furnaces that will help the country develop high-end finished products. Other areas are opening, too. China's biggest lender, Industrial & Commercial Bank of China, recently acquired a Jakarta bank called Bank Halim and hasn't ruled out more purchases. State Bank of India acquired another small lender, Bank Indomex.

But the real investment action will continue to be in energy and commodities. Indonesia has what China and India desperately want—stable raw material supplies to feed their high-speed economies. The trick for Jakarta is to avoid a one-way commodity grab and use its leverage to get some serious, long-term investment on the ground that will secure its economic future. It's always good to be in demand.


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