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May 2014 | Aluminium Weekly Market Tracker


Is the Indonesian unprocessed ores export ban likely to be modified or even abandoned in the future?

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On Jan 12th, 2014, the Indonesian bauxite export ban came into effect. Since then, the debate has raged on as to whether the ban on bauxite and other unprocessed ores will be modified or even abandoned entirely at some point in the future. The principal argument for this being the likelihood of the ban hurting the country’s current account deficits, and with it putting pressure on the Indonesian Rupiah. The currency declined by more than 20% in 2013, before falling to a five-year low against the USD in February 2014. In our view, it is unlikely that we will see any modifications to the export ban, as the objective of attracting capital investment to set up processing facilities within the country seems to be progressing well to date. According to the official data, the Indonesian government has already received commitments for $3billion of investment capital from Chinese investors, compared with 2013 revenue of $2bn from nickel exports and a further near $2billion from bauxite exports.

On May 21st, officials from Bantaeng County in the South Sulawesi province of Indonesia held a meeting in Beijing introducing the policies set up to allow companies to invest there. The meeting focused on investment and supporting policies for nickel smelters. Given that such a meeting took place, it is clear that the local government is extremely determined to attract new investment and if it works well, then there should not be any change to the export ban, at least in the near future.

According to the officials, Bantaeng County will be the first industrial district in Indonesia and an ideal place for nickel plants as it has access to abundant coal and nickel ore sources. In order to attract companies to build nickel smelters, the county is also seeking to raise investments from other third parties to construct the infrastructure required to viably operate nickel smelters. This would initially include power plants and port facilities. We believe the approach of developing an industrial district should prove very attractive to Chinese companies as they would only then need to invest capital to build the nickel smelters without the additional financial burden of investing in the essential ancillary facilities.

From the alumina refining side, although it requires a much larger capital outlay to build an alumina refinery, there have already been eight Chinese companies that have publicly announced such plans in Indonesia. These plants have a combined capacity of more than 10 million tonnes per year (mtpy). Hongqiao Group, for example, has entered into a joint venture to set up a refinery with capacity of 2 mtpy, for which construction is due to be finished by the end of 2014 and start operation in 2015. Therefore, it seems both nickel and alumina refining investments are progressing well which reduces the chances of any change to the export ban.

If the Indonesian bauxite export ban remains in place, we believe that over the short term, Chinese refineries will rely on the huge existing stockpiles of bauxite sitting in the country, while also looking for alternative sources to top up requirements. According to our estimates, China will have a huge deficit in bauxite with 38.9 million tonnes in 2014 but this gap will be readily filled by the existing stockpiles. Total Chinese bauxite imports in 2013 were 71.6 million tonnes and we estimate around 36.4 million tonnes was used to produce alumina (of around 13.0 million tonnes), which left 35.2 million tonnes bauxite as inventories at the start of 2014.

We believe Chinese companies will mainly look at Australian material as an alternative of Indonesian bauxite, especially following the closure of Gove refinery which will release 8 mtpy of bauxite capacity. Australian material also has a cost advantage as its average CIF price in 2013 was $57.6/tonne, compared with $58.2/tonne from India, $72.3/tonne from Guinea and $82.9/tonne from Brazil.

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Yang Cao
Research Analyst
Metal Bulletin Research
Tel: +44 (0) 20 7556 6047
Email: ycao@metalbulletinresearch.com