January 10, 2014 5:54 pm

Nickel gains ahead of Indonesia ban

Nickel saw its biggest one day gain since October as traders unwound short positions before the introduction of Indonesia’s ban on raw materials exports.

Nickel for delivery in three months on the London Metal Exchange rose more than 3.14 per cent to $13,834 a tonne ahead of the ban, which will see flows of nickel ore and bauxite stop from midnight on Sunday. The government in Jakarta is reportedly considering a range of exemptions for copper. Other last-minute changes are possible.

The ban on the export of unprocessed ores is an attempt by Indonesia to encourage industrial development and increase the value of its raw materials. But a drop in export revenues would affect the country’s current account deficit and hit the value of the rupiah.

Until Friday, LME-traded nickel had failed to react to the looming ban. In part, this reflected widespread scepticism among western investors that Indonesia, the world’s fourth most populous country, would press ahead with the policy. Indonesia has a history of backing away from controversial new laws.

However, market participants were hastily revising those views following reports that Indonesia had prevented at least 10 Chinese ships from leaving its ports. A warning from Hong-Kong listed China Nickel Resources that the export ban would dent its profitability provided further food for thought.

“The market has been pretty dismissive at the prospect of a ban,” said David Wilson, analyst at Citi. “Up until now there had been no price reaction at all. In fact speculators and hedge funds have been shorting nickel.”

Indonesia’s clampdown will be most keenly felt in China, which relies heavily on Indonesian ore to produce nickel pig iron. The high-grade nickel laterites required by Chinese pig iron factories are only found in tropical regions with high rainfall, especially Indonesia and, to a lesser extent, the Philippines.

It may also affect the aluminium industry. More than a fifth of China’s aluminium is produced from Indonesian bauxite imports. But unlike nickel ore, China should be able to source bauxite from other suppliers such as Australia and Guinea.

“Before Friday’s move nickel pig iron [in China] was trading at a $400 premium to LME nickel. That’s quite unusual,” noted Colin Hamilton, the head of commodities research at Macquarie, who said investors had suddenly stopped betting against nickel.

However, analysts said the nickel price was unlikely to “run away” because Chinese producers had spent 2013 stocking up and had supplies of up to a year.

“With the ban being well flagged, and with plenty of laterite stock sitting in China already, the impact on nickel pig iron output is likely to emerge relatively slowly,” said Leon Westgate, analyst at Standard Bank.

With legislative and presidential elections looming later this year there are also concerns whether the new law, which has already resulted in thousands of mine workers losing their jobs, will stick.

Set against that, analysts estimate the development of downstream processing by nickel and bauxite miners could see billions of dollars of investment in Indonesia over the next couple of years, which could prove popular with voters. In fact, there are more than 100,000 tonnes of nickel content processing capacity currently under construction, according to Goldman Sachs, and at least 400,000 tonnes planned.

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