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May 21, 2014 4:11 pm
Indonesia’s export ban on mineral ore has already sent one industrial metal into the stratosphere. The price of nickel, used to make stainless steel, has jumped by more than 40 per cent this year.
Now, some traders are looking at the prospects of another metal potentially affected by the new law – aluminium.
Between 2007 and 2013, Indonesia was responsible for 60 per cent of global exports of bauxite, a clay-like soil type that is mined in bulk, according to the consultancy CRU.
Last year, China, the world’s largest producer and consumer of aluminium, obtained around two-thirds of its bauxite from Indonesia. But this year it may get virtually none. Bauxite is refined into alumina, a white powder, and then transformed via electrolysis into aluminium, for use in everything from drinks cans to car bodies.
“Just like with nickel, there is no alternative supplier of bauxite of a sufficient scale and quality to replace the Indonesia material,” says one Asia-based metals trader. “I think aluminium looks an interesting bet.”
So far, the ban has yet to affect the aluminium price, which at $1,758 a tonne for three-month delivery on the London Metal Exchange on Wednesday is slightly down for the year. There are several reasons for this.
First, Chinese aluminium producers were prepared for the change of rules in Indonesia. In 2013, Chinese bauxite imports jumped nearly 80 per cent, and stockpiles grew to between 12 and 18 months of consumption, analysts estimate. Companies in China also started diversifying supply, buying more expensive material from Australia and India, for example.
In addition, there are still vast above-ground warehouse stocks of aluminium – estimated to be at least 10m tonnes, or more than two months of global consumption – even if much of it is not immediately available because of long queues at the biggest depots.
But there are signs that the Indonesian ban, which was designed to spur local industry, is now having an effect on Chinese producers. The cost of landing bauxite in a Chinese port has increased from a little more than $40 a tonne last year to $60 a tonne, due to the cost of bringing in ore from further afield, CRU says.
Aware of the looming supply crunch, some companies are seeking to secure new resources. China Hongqiao, a large aluminium producer heavily dependent on Indonesian bauxite, announced this month that it was looking to buy a mine in Africa. Guinea, in west Africa, has vast reserves.
Hongqiao has also committed to building an aluminium smelter in Indonesia, though it is one of the few foreign companies to have done so. Nic Brown, head of commodities research at Natixis, says that Chinese aluminium companies have already invested heavily in expanding capacity domestically, resulting in overcapacity and low profitability.
“That makes it difficult to justify new facilities in Indonesia,” says Mr Brown.
For China, the challenge is not simply replacing the ore from Indonesia, but also finding new sources to keep up with its ambitious expansion plans for aluminium production. Wood Mackenzie, the consultancy, reckons that Chinese bauxite demand will increase by 30 per cent by 2018, and said in a note this month that the Indonesian ban “could be transformative to the global bauxite market in the longer term”.
Much will depend on whether the bauxite ban sticks. Marius Toime, a partner at the law firm Berwin Leighton Paisner in Singapore, says it is “highly unlikely” that the Indonesian government will completely reverse the mineral ore ban.
“It is possible, though, that there will be some relaxation for certain minerals,” including bauxite, he says.
Because developing aluminium smelters and refineries is expensive and time consuming – unlike with nickel, where blast furnaces can be erected fairly quickly – almost the entire Indonesian bauxite industry would have to shut down for several years if the ban holds.
Russian aluminium producer Rusal, which last year lobbied the Indonesian government to proceed with the new law, in the hope of raising global prices, reckons the ban will remain in place until at least the end of 2015. By then, China’s stockpiles will have been exhausted, and some refineries may have to scale back production.
“From mid-2015 to late 2016 the market could find itself quite short of bauxite,” says Mr Brown of Natixis. “If that happens you would expect the price of aluminium to go up.”
Big aluminium producers expect that the rise will be steady, rather than spectacular, as with nickel, and would provide welcome breathing room for an industry struggling to cover its costs.
Anthony Everiss, aluminium analyst at CRU, says that if the ban is maintained, the aluminium price could reach $2,300 a tonne next year, a 30 per cent increase on the current price.
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