Implications For Nickel And Alumina Producers From Indonesian Bans

This story features PANORAMIC RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: PAN

-Bans bullish for prices longer term
-Large surpluses need to be drawn down
-Nickel, alumina producers still challenged

 

By Eva Brocklehurst

The Indonesian government has reiterated plans to ban tin, bauxite and nickel ore exports from January 2014. The extent of the bans and the specific implications are still unclear, as some exports may still be allowed if companies reveal an intention to build smelters in the country.

The move is populist, in CIMB's opinion, as Indonesia proceeds to a national election in April. The broker doubts the country will enforce the bans in full and with immediate effect. In the case of bauxite, the analysts expects an interim measure of increased export tariffs is likely, beyond the current 20%.

Macquarie considers the news a long-term bullish signal for prices, although the broker's base case does not assume a material ban on nickel exports. High levels of nickel ore inventory in China and finished metal on the LME are likely to prevent any price recovery for the present. Nevertheless, if Indonesia goes ahead it's likely that a major part of global nickel ore and bauxite supply will be withheld from the market. Nickel inventories remain high but, if a ban of nickel ore exports from Indonesia does occur, Macquarie expects industry inventories to return to more normal levels in 12-18 months.

Australian nickel miners have been under pressure for some time and, since the beginning of November, the bulk of stocks under the broker's coverage has fallen 20-25%, on deteriorating sentiment,with a corresponding 6% fall in the nickel price. All four nickel stocks that are in production look cheap on earnings multiples, according to Macquarie. Panoramic Resources ((PAN)) and Mincor Resources (MCR)) are the higher cost producers and are trading on FY14 earnings multiples of one, while higher margin producers Western Areas ((WSA)) and Independence Group ((IGO)) are trading at around four times. Macquarie considers Panoramic offers the greatest leverage to recovery in the nickel price while Western Areas is the preferred stock.

Commonwealth Bank analysts do not think a recovery in nickel prices, based on the export ban, is likely. This is because, with the bans were flagged for some time, China's low-cost furnaces have stockpiled the necessary high-grade Indonesian laterite ore. Commitments by nickel smelters to build at least 146,000 tonnes of new refined nickel capacity in coming years is also expected to soften the Indonesian government's stance. Moreover, the analysts consider there could be some reluctance to follow through on the ban because of the growing current account deficit and weakening currency. The CBA analysts think the nickel market will stay in surplus to 2016 because of ongoing production at loss-making operations and estimate that around 30% of refined nickel supply in 2014 will be cash cost negative. Supply growth may be slowing, but the analysts ask whether it's enough to reduce the large and rising stockpile of nickel metal at the exchanges.

Turning to bauxite, and Indonesian export bans make Alumina's ((AWC)) outlook just a little rosier. CIMB suspects the bans will pressure China's alumina production costs. China sources around 70% of its bauxite imports from Indonesia. If there's a shortfall, China will rely increasingly on imports of alumina to keep its aluminium smelters at full capacity. This could place upward pressure on seaborne alumina prices and lead to higher spot prices in 2014. CIMB estimates AWC's cash costs will fall over the next two years, in part assisted by a weaker Australian dollar. Combined with slightly higher alumina prices, the broker estimates the stock's alumina margins will double in 2014 to US$62/t, from US$31/t in 2012. CIMB retains an Outperform rating for AWC.

Credit Suisse doesn't envisage it going all the company's way. The outlook for the AWAC JV, the world's largest supplier of third party alumina, is a little better with the ban, as well as with Rio Tinto's ((RIO)) planned closure of Gove refinery. The alumina balance should swing to a deficit in 2015 and this should support the spot price and allow AWAC to increase sales to fill some Gove contracts. The ban in Indonesia could even, longer-term, push the alumina price to US$400/t, which is the level needed to justify building new refineries outside of China. Still, Credit Suisse does not believe this will happen in 2014, as the Chinese are producing alumina at high levels using bauxite stockpiles.

Credit Suisse still finds the investment case for AWC challenging, as ultimately there is a massive aluminium stock overhang. Hence, an Underperform rating. The broker is concerned that, for AWAC, the poor aluminium price threatens an eventual reckoning when aluminium investors can no longer use financing profits to support the oversupply. As a result the broker suspects the entire aluminium complex may be under pressure for some years.

Commonwealth Bank analysts also struggle to see aluminium prices rising to any degree over coming years. The market has to absorb the rise of lower cost producers in China, potential flows of metal from inventory and Western countries will need to cut capacity to assist in balancing the market.
 

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