Indonesia introduced new rules on Thursday that will allow exports of nickel ore and bauxite and concentrates of other minerals under certain conditions in a sweeping policy shift by the key global supplier.

A ban on unprocessed ore exports was imposed in 2014 to spur higher value smelting industries, but the government of Southeast Asia's biggest economy has faced a hefty budget deficit and missed its 2016 revenue target by $17.6 billion.

The resumption of shipments may have been drafted to help stop the gap.

The new regulations, which took effect on Wednesday, sent nickel prices tumbling more than five percent to a four-month low of $9,660 a ton before they recovered.

The rules include broad changes to permit extensions, which may now be applied for up to five years in advance of expiry, as well as new divestment requirements.

Nickel miners must now dedicate at least 30 percent of their smelter capacity to processing low-grade ore, defined as below 1.7 percent nickel.

"Where, considering installed (smelter) capacity, they can't absorb production, (ore) will be allowed to be sold overseas," Coal and Minerals Director General Bambang Gatot told reporters.

Bauxite with an aluminum oxide content of at least 42 percent may also be exported "in certain amounts" under the new rules.

Gatot said exports would be allowed for up to five years and would be restricted to volumes decided by the government and independent inspectors, but he gave no further details.

"The government is between a rock and hard place. It's in a dire fiscal position on the one hand and allowing nickel and bauxite (exports) will help with that," Jakarta-based foreign legal counsel Bill Sullivan told Reuters.

A mining ministry official said in October that Indonesia could export up to 15 million tonnes of nickel ore in 2017 if the ban was lifted, about one-quarter of 2013 levels.

The policy shift was welcomed by state-controlled PT Aneka Tambang Tbk, whose revenues were hit hard after Indonesia banned nickel ore exports in 2014.

"Regional economies will grow, (and) mining areas that died because of the export ban can grow again," Antam CEO Tedy Badrujaman told Reuters.

Last year, Badrujaman said Antam hoped to export 20 million tons of low-grade ore to help attract smelter project financing, around 10 times more than the ore it currently processes domestically.

DOUBLE BLOW?

The new rules disappointed many investors in Indonesia's budding nickel smelter industry, which had been boosted by the export ban.

Jonatan Handojo, executive director of the Processing and Smelting Companies Association (AP3I), told Reuters the new policy "damages Indonesia's image throughout the world and makes us look like our laws and regulations can be changed just like that."

"Chinese companies will be most unhappy because they have invested something like $15 billion in developing smelters that are already in operation," Handojo said, adding the change could damage Indonesia's relations with China.

R. Sukhyar of the Indonesia Smelting Association said many aspects of the new rules were confusing. The ore export ban was designed to give Indonesia's resources sector a competitive advantage over its neighbors, and allowing exports again could cut short its development, he said.

"The industry is still in its infancy and the government should wait before changing the rules."

The Philippines displaced Indonesia as the world's top nickel ore exporter in 2014, but has now also started restricting output due to environmental concerns.

Another Jakarta-based nickel miner, speaking on condition of anonymity, told Reuters the new rules were a "massive double blow" for smelters.

"They have to take low-grade ore, which will raise operating costs, and then on top of that the market will crash and send prices down further," he said.

ARBITRATION?

The new rules are a mixed bag for U.S. mining giant Freeport-McMoRan Inc, which now has a window to continue copper concentrate exports beyond a previously imposed Jan. 12 deadline for full domestic processing, and to extend its long-term operating permit.

Freeport's Grasberg operation in Indonesia currently exports around two-thirds of its output as copper concentrate, but its shipments were stopped indefinitely on Thursday along with those of other concentrate exporters.

A spokesman for Freeport Indonesia said the company was studying the new policy but declined to comment further.

Companies like Freeport must also switch from Contracts of Work (COW) to special mining licenses (IUPK) before they can apply for new export permits or operating permit extensions, a process mining minister Ignasius Jonan said would be done in a "maximum of 14 days" once all necessary documents are submitted.

But not everyone was convinced.

"There is still the question of whether there will be an interruption in operations because of the (administrative) requirement to change to IUPK," Sullivan said.

To do so, Freeport will have to agree on new taxes and royalties that it is currently exempt from, and divest up to 51 percent of its Indonesian unit from 30 percent under current rules. So far it has divested only 9.36 percent.

Asked about the legal risks to the government from the policy shift, Jonan said "If there is arbitration, I am ready to face it."