Commodities | Aug 28 2013
-Indonesia changing tack on ore exports?
-Is the European recession over?
-A base forming for gold?
-Iron ore price resilient
By Eva Brocklehurst
Indonesia has released an emergency fiscal package designed to address a worsening current account deficit and weakening currency. One of the measures is the removal of export quotas on mineral and metal ores. Removal? Indonesia was planning to reinstate a ban on mineral ore exports from January 1, 2014. The on again, off again, nature of the bans is confusing. Why does it matter?
Indonesia's bauxite exports collapsed in May 2012 when an earlier export ban took effect, but recovered in subsequent months after the Supreme Court overturned the ban in September. Indonesia accounts for the largest share of the world's seaborne bauxite and Chinese bauxite imports, especially to the coastal province of Shandong. The May 2012 mining policy instigated export quotas and an average 20% export tax on 14 minerals. At this time, a blanket ban on exports of these products was cited for 2014. The intent was to end mass exports of raw materials and cultivate value-adding via a substantial domestic metals processing industry. Now the quotas are coming off. What about the bans?
Morgan Stanley believes the removal of quotas will result in an increase of nickel ore and bauxite exports to China, to the detriment of primary nickel and alumina prices. China relies on Indonesia for the majority of its nickel ore, used in the nickel pig iron process, as well as bauxite, the key feed for alumina refining. Many saw the policies last year as restricting that flow but, after stockpiling in anticipation of the policy change, China was able to adequately import from alternative sources. Morgan Stanley suspects this latest backpedal in Indonesia's policy ensures China will be able to import as much as required from Indonesia for the remainder of the year. It also signals, in the broker's opinion, that the 2014 outright ban of unprocessed ore will be relaxed, or even cancelled. These developments help relieve some concerns surrounding possible tightness in the primary nickel and alumina markets.
To estimate the impact of the removal of Indonesia’s export quotas between now and 1 January 2014, Commonwealth Bank analysts subtracted June's exports of 4.2mt from the highest ever monthly bauxite export total of 5.7mt, showing a difference of 1.5mt per month conceptual additional bauxite supply. This is a crude estimate, as there's no knowledge of the extent of export quotas applied in the period of Indonesia's highest ever monthly export total. What can be said is that higher Indonesian bauxite exports will either displace other seaborne supply and/or Chinese domestic supply, and/or reduce world bauxite prices. Also, cheaper bauxite is likely to put downward pressure on Chinese alumina and aluminium prices.
Indonesia is a key supplier to China and Japan's ferronickel smelters. Removing export quotas will increase the availability of high-grade nickel ore but even if additional nickel ore is available, China’s ferronickel smelters may not be buyers, as Commonwealth Bank analysts understands that up to half of them are losing money. Furthermore, unconfirmed sources suggest that Indonesia's nickel ore exporters are operating close to capacity. The analysts see limited scope for additional Indonesian nickel ore exports to reduce ferronickel production costs, and therefore believe Indonesia's recent measures may be relatively neutral for nickel prices.
Recent data suggests that the 18 month-long European recession has now ended. Euro area real GDP grew at a 1.1% annualised rate in the June quarter, following six successive quarters of economic contraction. JP Morgan's economic researchers expect this momentum to continue, and forecast euro area growth of 0.5% in the September quarter, 1.0% in the December quarter and 1.3% in 2014. Base case global balances currently embed declining or flat European metals demand for 2013, relative to last year, and modest real demand growth in 2014. Further improvement in economic trends would pose upside risks to these forecasts, tighten balances, and likely trigger a re-stocking among European metals consumers. Anecdotal evidence suggests metals users in Europe have run down inventories to very low levels. Hence, JP Morgan thinks European metals use has likely found a base and this removes a significant headwind to global metals demand.
Meanwhile, gold shrugged off news that Paulson & Co had cut its exchange-listed gold exposure in half. Instead, the metal rose 2.2% to US$1,365/oz. This may be defining the end of the 10-month, 25% fall in the gold price and the 50% fall in gold equities, in JP Morgan's opinion. The World Gold Council reported that physical gold demand remains strong, questioning the price weakness seen in paper markets. Additionally, gold supplies could be constrained in September if labour strikes are initiated in South Africa.There's typically some positive seasonality to the gold price in August/September, helped by India, which is still the largest single gold market. Indian demand may be impacted by tougher regulations and a weaker rupee but data from the WGC suggests that, in the case of currency weakness, it actually seems to lift gold buying. JP Morgan would not be surprised to see a stronger gold price in the run up to the annual gold conference in Denver, Colorado, in September.
Iron ore continues to defy expectations of a slump in the September quarter. So far this quarter, the CFR China import price index has averaged US$131/tonne against consensus expectations of US$115/t. The unexpectedly high price is a function of a tight spot cargo market and robust Chinese steel production growth, which is currently annualising growth of over 10.4%. This trend contrasts with lacklustre demand growth in the March quarter and for Morgan Stanley raises the issue of where this output is going. China is not exporting steel to a great degree, and steel inventory levels are continuing to decline. It has led the broker to assume that faster infrastructure development and investment in property are driving the high level of steel production and demand. While expecting the iron ore price to drift lower from the current level, Morgan Stanley thinks it will still be resilient in the mid point of the current trading range of US$110-143/t. It seems there's a mild growth rebound in China.
The latest monthly data form the International Copper Study Group shows the monthly copper supply/demand balance flipped to deficit for the first time since last September. Last May was precisely when problems were peaking at the Grasberg copper operation so there was likely a shortage of concentrate. This could render this data point an anomaly. Nevertheless, supporting the data are other near-term fundamentals which are showing signs of improvement, such as LME stocks declining since June and Shanghai stocks declining since March. Chinese imports have also increased every month since March.
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