Smelters

As one of the largest mining and smelting hubs in Asia with 30% of global nickel reserves, as well as an abundance of copper, aluminium and bauxite, Indonesia has over 90 smelters in the planning stage. As these base minerals are key components for electric vehicles and batteries, the development of smelter projects within the country is being driven by the rising global demand for ‘green commodities’, coupled with government regulations that require mined minerals to be processed and refined domestically prior to export.

Smelter development in Indonesia: Key risk considerations

At every stage of the smelter project, developers need to ensure that key risks are adequately mitigated with the appropriate insurance program. The complexity of risks within the smelter ecosystem (which includes the smelter, supporting mining and processing facilities, captive power plants, transmission lines, terminals or ports, and owned or third party vessels) introduces additional challenges to risk management and risk transfer strategies.

Key risk #1: Availability of power

As a large number of planned smelters in Indonesia are located in remote locations with limited grid access and reliability concerns, this is a principal risk during testing, commissioning, and subsequent operations. Insufficient power for aluminium smelters, for instance, can lead to pot line freezing, with considerable costs and time needed to restart operations.

Key considerations: Smelter developers typically turn to establishing captive power plants to ensure a reliable power source. As such, it is important to understand the latest insights on insurance coverage availability for each fuel option by partnering with the right advisor from the start of the planning stage:

Key risk #2: Project interdependency

Sub-developments within a smelter project may be undertaken by different project companies with varying financing structures. A loss event or delay at one sub-development may have consequential delays across the smelter ecosystem.

Key consideration: As insurance coverage for interdependency risks remains limited, developers must consider other mitigation measures, such as power redundancy, alternative suppliers, or contractual risk allocation.

Key risk #3: Lead time of bespoke equipment

Complex smelter developments often involve bespoke manufacturing of key equipment with long lead times (e.g. 12 months or more). A loss event requiring replacement may be worsened by global supply chain delays and disruptions.

Key considerations: Expediting costs in insurance policies are typically limited to 20% of the loss amount, and Delay in Start Up (DSU) indemnity periods should be structured to reflect the full replacement time horizon.

Key risk #4: Technology reliability

The choice of smelter technology and contractor experience is a key focus for insurers. The use of a prototypical technology that lacks ‘proven’ operating hours worldwide may affect the insurance terms available for risk transfer.

Key consideration: Technology risk needs to be managed via warranties with suppliers and contractors.

Key risk #5: Lengthy ramp-up, testing, and commissioning period

On top of the already heighted risk exposures during the long ramp-up period for smelters (at times up to 12 months), any design issues that arise may require an extended rectification process and result in lengthy delays and significant revenue loss.

Key consideration: Insurers will need assurances of the developer’s, contractor’s, or third-party commissioning consultant’s experience in handling complex smelter ramp-up procedures.

Key risk #6: Performance test and transition to operations

Often, the transfer of risk from a construction to an operational insurance program is not straightforward, as handovers between multiple trains and phases may be staggered, performance tests rarely meet the 100% criteria, and revenue-generating activities may have commenced prior to the formal handover.

Key consideration: Developers need to ensure the smelter project is not ‘stuck’ in-between construction and operational insurance covers. To do so, they must work closely with their insurance advisors to identify and agree the key milestones that define when “in-principle” operations have started.

Key risk #7: Natural catastrophe (NatCat) exposures

Indonesia’s geographical location is prone to seismic activity, hence NatCat exposures have long been an underwriting concern. Regions receiving some of the most smelting investments (e.g. Sulawesi and North Maluku) have acute seismic risks.

Key consideration: Developers need to adopt earthquake-resilient design methods and mitigation measures in line with internationally recognised standards.

Faced with these key risks, how do smelter developers decide on the right risk mitigation approach and develop a detailed insurance strategy to protect against loss?

Achieve the best risk transfer outcomes for your smelting project

To ensure your project’s success amid tough insurance conditions, it is vital to engage a specialised broker with a comprehensive understanding of smelter projects in Indonesia and the experience to tailor the appropriate insurance strategy, articulate the developer’s approach on key risk issues, generate optimal appetite from insurers, as well as prepare high-quality market submissions to address insurer concerns and finalise insurance arrangements to address all project needs.

Having worked on multiple smelter projects in Indonesia, Marsh’s highly proactive approach is tailored to the finance structure of each smelter development, and combines market-leading risk advisory and insurance broking experience to ensure the success of your smelter project from planning to operations.