-- Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 15 The immediate
impact of Indonesia's ban on exporting unprocessed mineral ores
has been felt in nickel markets, but the slow burn, and
potentially larger, may be in aluminium.
London Metal Exchange three-month nickel jumped 7.4
percent between the close on Jan. 9 and Jan. 14, when it ended
at $14,340 a tonne.
In contrast, London aluminium futures barely nudged
up 0.6 percent over the same three-day trading period, and the
benchmark contract in Shanghai weakened by 0.6 percent.
It may well be that the market is accurately reflecting more
immediate concern over the supply of nickel, since Indonesia
supplies about 13 percent of the world's mined nickel.
But the likelihood is that any loss of Indonesian cargoes
will act merely to lower the available surplus of nickel,
suggesting that the current rally may not be sustained.
However, the story with aluminium may be slightly different,
at least over the medium to long term.
While Indonesia relaxed some of its bans on exporting raw
mineral ores until a 2017 deadline for complete domestic
processing, bauxite wasn't among them.
Bauxite is the raw material used to make alumina, which in
turn is used in producing aluminium.
Indonesian bauxite exports account for about 12 percent of
global aluminium production, but this is not evenly spread.
China is the main buyer of Indonesian bauxite and a Goldman
Sachs report on Dec. 5 estimated about 30 percent of the growth
in Chinese aluminium capacity since 2007-08 has been produced
using ore from the Southeast Asian nation.
In other words, China is highly reliant on Indonesian
bauxite, and is likely to have counted on its continued
availability in planning the ongoing expansions of its aluminium
Now, as Goldman Sachs points out, the Chinese have been
stockpiling ahead of the ban and are believed to have around 45
million tonnes of bauxite, enough to meet one year's demand.
Chinese bauxite imports surged 81.8 percent to 65.5 million
tonnes in the first 11 months of 2013 over the corresponding
period a year earlier.
Indonesian exports made up the lion's share of this figure,
at 44.4 million tonnes, followed by Australia at 13.3 million
and India at 5.01 million.
But it is unlikely the Chinese will be comfortable running
down their stockpiles for too long.
While they might be happy to do so for the first six months
of 2014, what happens after that?
The likelihood is that the Chinese will start to look for
alternative supplies, perhaps aggressively so, as they certainly
won't want to hinder their aluminium production.
BAUXITE COSTS TO RISE
It is unlikely that Indonesian exports will drop to zero,
with commodity researchers at ANZ Banking Group estimating that
20 percent of bauxite production has received exemptions based
on pledges by miners to build downstream facilities.
But even if 20 percent of Indonesian output does make it to
world markets, that still leaves a gaping hole in supply,
particularly for the Chinese.
Assuming that 2012 was a more "normal" year for Chinese
bauxite imports, it shows purchases of 39.6 million tonnes, down
11.3 percent from 2011, of which 27.9 million, or about 70
percent, was sourced from Indonesia.
It thus appears likely that China will be searching for
something in excess of 20 million tonnes of bauxite a year once
it starts to exhaust its stockpiles.
It may well be able to do this, but the cost is almost
certain to rise, as Indonesian bauxite was 9.4 percent cheaper
than that from Australia and a massive 37 percent below the cost
of supplies from Brazil, China's November customs data shows.
There are alternatives to using bauxite, such as shutting
down alumina capacity and importing more of the intermediate
product from suppliers such as Australia.
China may also curb some of its existing aluminium capacity
or scale back planned expansions, which would also serve to
lower the global capacity surplus.
For several years now, participants in the aluminium market
have grown accustomed to thinking of it as well over-supplied.
Chinese capacity additions have so far outweighed the
closure of higher-cost operations in Russia, Europe and
But this may be starting to change, especially if Chinese
aluminium producers start to lose some competitiveness because
cheap Indonesian bauxite supplies dry up.
(Editing by Clarence Fernandez)