Australia | Nov 09 2012
– Supreme Court of Indonesia sets aside a ban on raw material exports
– Ruling has potential to impact on bauxite and alumina
– Dispute expected to be resolved quickly
– Brokers update expectations for Alumina on the news
By Chris Shaw
In May of this year the Indonesian Government imposed a ban on the export of unprocessed raw materials but this week the Supreme Court of Indonesia set aside the ban, meaning the government is no longer permitted to interfere with the mineral exports industry.
This conflict between the Supreme Court and the Government is significant as Indonesia is a major global exporter of materials such as thermal coal, tin, nickel-bearing laterites and bauxite. For each of these, Indonesian exports are critical to global supply.
The likely biggest impact will be on global bauxite trade, as UBS suggests Indonesian exports may recover from around one million tonnes per month now to pre-June levels of more than five million tonnes per month.
If the bauxite price falls as a result of Indonesian exports increasing then UBS sees China as likely to import more bauxite from Indonesia to convert to alumina. Given Indonesia previously supplied around 15% of the world's bauxite, this means China would buy less alumina on the global market.
UBS suggests this could be viewed by commodity and equity markets as a new bear-point for the global bauxite and alumina markets, but such an outcome may be fleeting in the broker's view. This is because the Indonesian Government remains determined to reform the nation's mining industry to lift tax revenues, develop a manufacturing sector and lower the environmental impact of operations.
This development is needed as apart from tin smelting, there is very little vertical integration in Indonesia's mining sector. The 2009 Mining Law intended to ban all raw material exports beyond 2014 was put in place in part to address this, with Credit Suisse noting the ban imposed in May was a response by the government to the 2014 ban being widely ignored by Indonesian mining companies.
The Court ruling appears to relate to an inappropriate authority acting for the government in imposing the ban in May, which suggests a quick resolution to the current dispute. Important for the longer-term, UBS points out the latest Court ruling doesn't alter the 2009 Mining Law.
This means that longer-term China will need look elsewhere for its bauxite supply, or be forced to increase its imports of alumina by as much as one to two million tonnes per month. UBS estimates this would equate to around 4% of the global alumina trade.
To reflect the latest dispute in Indonesia brokers have been quick to assess the potential impact on Alumina ((AWC)). Given UBS expects a negative short-term impact on prices the broker has lowered earnings estimates by more than 20% for FY12, which also reflects a marking-to-market of prices.
Credit Suisse agrees with UBS in suggesting longer-term Alumina appears a likely beneficiary of Indonesia's Mining Law as China's need to import more alumina will support prices. Forecasts reflect this, as Credit Suisse expects alumina prices will rise from an average of US$320 per tonne this year to just over US$360 per tonne in 2013 and US$400 per tonne in 2014.
Given this view is unchanged Credit Suisse has made no significant changes to its model for Alumina. The broker is forecasting earnings per share (EPS) of minus US2.4c this year and US3.2c in 2013, which compares to UBS at minus US3c and zero respectively.
JP Morgan expects the Supreme Court decision could ease pricing tension in both the bauxite and alumina markets and the broker retains the view both alumina and aluminium remain in structural oversupply longer-term.
As well, for Alumina specifically JP Morgan suggests while there is a new debt facility in place with the AWAC joint venture, partner Alcoa is likely to want to repay this facility to consolidate it on its balance sheet. This would likely limit distributions from Alumina over the medium-term.
Given a lack of positive catalysts for Alumina, JP Morgan retains an Underweight rating. Credit Suisse is more positive and rates Alumina as Neutral, this given some risk in terms of the speculative nature of its alumina price forecasts in coming years.
Overall the FNArena database shows Alumina is rated as Buy four times and Hold and Sell twice each. Both UBS and BA Merrill Lynch are among those with Buy ratings, both seeing valuation upside given price targets of $1.40 in both cases imply significant upside from current share price levels.
The consensus price target for Alumina according to the FNArena database stands at $1.13, with targets ranging from Citi at $0.60 to Deutsche Bank at $1.42. This implies upside relative to the current share price of more than 30%.
Shares in Alumina today are unchanged in a weaker overall market having last traded at $0.845. This compares to a range over the past year of $0.625 to $1.565.
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