Commodities | Jan 16 2014
– Indonesia bans bauxite and nickel ore exports
– China well stockpiled
– Alternatives available
– Price impact minimal
By Greg Peel
The ban on export of ore from Indonesia, announced on Sunday, did not come out of the blue. Indeed, the Indonesian Mining Act of 2009 banned the export of all unprocessed mineral products commencing on January 12, 2014 – Sunday.
It’s a value-add thing. Exporters of raw material earn profits from that export, but value is then added each step upward from processed ore to manufactured product. The 2011 ban on rare earth metal export by the Chinese government, while clumsily handled, is an example. China was selling a lot of rare earths to Japan, and Japan was using the raw material to ultimately manufacture a range of components and end-products, upon which the Japanese enjoyed the mark-up. China now manufactures its own components and end-products and hence would rather keep the raw materials, and the mark-up, for its own export economy.
As India continues to bungle along, analysts are now looking to Indonesia, the world’s fourth most populous country after China, India and the US, as the next “China” off the rank. Indonesia has the same idea. To become an economic powerhouse, and lift 250 million citizens above peasant status, Indonesia must become an exporter of processed and manufactured products (or at the very least less of an importer) and not just an exporter of raw materials.
The problem is capacity within Indonesia to process mineral ore is almost non-existent. Indonesia boasts vast reserves of bauxite, for example, but does not have the facilities to refine alumina. Hence Indonesia simply sells bauxite. Clearly the Indonesian government would be rather amiss if it simply banned exports of bauxite and forwent export dollars when nothing can then be done with the bauxite. Hence the ban is an incentive. The ban will be eased on those companies which pledge to invest in the construction of downstream capacity – smelters and the like. Bit of carrot and stick going on.
The 2009 Act intended the ban of bauxite, nickel ore, iron ore, copper, lead, zinc and manganese concentrate. Aside from bauxite and nickel ore, all other materials have been let off the hook until 2017. The initial global impact of the ban, if any, will be felt in the bauxite (and thus alumina/aluminium) and nickel ore (thus stainless steel) markets.
Indonesia accounts for 11% of the world’s mined bauxite and 13% of mined nickel. Some 80-90% of this material is exported to China. In 2013, China imported 70% of its bauxite and 55% of its nickel ore from Indonesia. No guesses as to which two economies will be most affected by the Indonesian government’s ban. But the point is as to whether the ban will imply both a price squeeze and the potential for non-Indonesian producers of bauxite (or alumina) and nickel to pick up the slack.
On Sunday’s news, the LME nickel price rallied 6.5% in two sessions. The aluminium price was a little stronger, but then the US dollar was also weaker, so the impact is thus insignificant. The nickel rally has largely been attributed to a short-covering rally amongst traders, while aluminium has long been in oversupply. Once we get past the short-covering in nickel, we might conclude the ban has had little immediate price impact. There are two immediate reasons for this.
The ban has been coming since 2009. China has had plenty of warning. It is estimated China has up to now stockpiled enough bauxite and nickel ore for 9-10 months of consumption, above and beyond a typical 2-3 month running inventory. Then there is the concession within the ban. Indonesian producers need only pledge (and presumably come up with some actual plans) intentions to invest in downstream capacity to be exempted from the ban. ANZ Research estimates as much of 60% of Indonesian nickel ore and 20% of bauxite will thus be exempted given commitments already made by producers between 2009 and now.
Nevertheless, assuming the ban “holds” (elections aren’t that far off in Indonesia), China will eventually run down its stockpiles. On the bauxite, and thus alumina, front, China could buy more alumina from other sources such as Australia. But then aluminium is currently in chronic global oversupply. Rather than pay top dollar for less available alumina, China could use the opportunity to start curtailing its aluminium production overcapacity.
Nickel substitution is not so readily available, although the Philippines has been suggested as the most obvious source. The issue is, however, that the Philippines sells only low-grade nickel to China, contained in iron ore. Indeed, the Philippines does not sell a lot of nickel ore to China per se. It mostly sells iron ore with a bit of nickel thrown in for good measure. With Philippino nickel China could make only lower grade stainless steel, but then in the great nickel price squeeze of the noughties, China responded by producing only lower grade stainless steel, or by substituting chromium for nickel. China has been here before.
Another alternative is for China to actually build the downstream operations the Indonesian government wants, in Indonesia. This throws up another interesting scenario, because clearly Indonesian companies will be looking to foreign companies to help build/fund this desired capacity, and it won’t just be the Chinese sticking up their hands. But no doubt certain guarantees would be required by foreigners before any sums are committed. Perhaps, commitments that, for example, the Indonesian government would never step in and interfere with market dynamics. Like imposing bans.
Which brings us back to the start.
The bottom line is there remains uncertainty with regard to Indonesia’s policy. One the one hand, whether it will hold, and whether it will work, and on the other hand, whether it will much disrupt a global market which has various ways and means of adjusting, and the time to implement those adjustments.
We must remember also that while Indonesia is potentially (although not yet empirically) evoking a price squeeze on aluminium, for example, last year’s tightening of LME inventory laws should potentially (although not yet empirically) increase the availability of aluminium and thus reduce the price.
The bottom line is that Indonesia’s mineral export bans, in place as of Sunday, are not causing panic.
In addition, analysts at JP Morgan highlight Indonesia is also responsible for 5-10% of global zircon supply and the previous ban, put in place in 2012, resulted in virtually no zircon exports leaving the country in the subsequent three months. On this basis, speculate the analysts, it is well possible that zircon supplies might again be impacted in the short term.
Many companies in Indonesia are currently in the process of upgrading their plants to produce higher grade product, reports JPM. The analysts suggest one obvious result from this is an increase in the country's marginal cost. On JP Morgan's observation, Indonesian exports start reducing whenever the price of zircon falls towards US$1500/tonne.
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