* Indonesia supplies about 60 percent of China's bauxite
* China has around 10 months of bauxite stockpiled -
* Gap of around 10 million tonnes of bauxite possible -
By Melanie Burton
SYDNEY, Jan 31 China has found an inadvertent
ally in its efforts to slim down a bloated aluminium sector,
with Indonesia's ban on exporting metal ores set to boost costs
of the raw material bauxite and pile more pressure on struggling
Beijing has been issuing broadbrush rules aimed at reining
in overcapacity in sectors such as aluminium and steel for about
a decade, but plans have usually been thwarted by resistance
from local governments anxious to boost growth.
In the aluminium sector, ageing and inefficient smelters are
already grappling with rising power prices, but now face
potential bauxite shortages after Indonesia halted ore shipments
on Jan. 12, as part of efforts to make miners process minerals
China is the world's biggest aluminium producer and curbing
expansion could ease a global surplus of the metal and even lead
to the country resuming sizeable imports of refined aluminium.
It is also likely to provide support to the price of a metal
that has been depressed for years.
"(Indonesia's ban) will have a huge impact on the Chinese
aluminium industry in the medium term," said Citi China
commodities analyst Ivan Szpakowski.
Despite building up big stockpiles ahead of the export ban,
Chinese aluminium makers may struggle to find alternative
supplies at similar prices.
It takes roughly five tonnes of bauxite to produce one tonne
of aluminium. Analysts estimate China has around 10 months
supply of bauxite stockpiled after importing 48 million tonnes
from Indonesia alone last year, up 79 percent from a year
"China's bauxite stocks may be used up around the end of
this year and refineries would need to import," said a manager
at a big Chinese aluminium smelter.
But bauxite prices are likely to be higher by then and drive
up alumina and aluminium prices, added the manager, who declined
to be identified as he was not authorised to speak to media.
China's production of aluminium is expected to grow 8
percent to 26.5 million tonnes in 2014, accounting for half of
global output, according to Beijing consultancy AZ China.
China could get some bauxite from Australia, where Rio Tinto
is closing its loss-making alumina refinery Gove in
northern Australia. The firm will continue mining and expects to
be able to export 7-8 million tonnes a year.
But Macquarie estimates that Pacific basin suppliers will
not be able to make up for the drop in Indonesian shipments,
leaving China short of about 10 million tonnes that would have
to be filled by mines in Brazil, Guinea, Ghana and Jamaica.
Sourcing imports from further afield could add $80-$100 a
tonne, or 5 percent, to the all-in aluminium price which
includes LME futures prices plus physical surcharge for
delivery, given extra logistics costs, it said.
"This will put pressure on Eastern seaboard Chinese
smelters, and if China's clamp down on inefficient capacity
means closures ... China could start to import refined material
again - if the price is right," Macquarie said in a report.
The Western world is still working through an overhang of
around 10-12 million tonnes of aluminium built up in the wake of
the global financial crisis which has kept a lid on prices.
INDONESIAN SMELTER PLANS
Indonesia's export ban was set down in 2009, but has been
ignored by many miners in the hope the government will give
ground, as it has with other controversial policies in the past.
China Hongqiao Group Ltd is one firm building an
Indonesian alumina refinery that is due to be completed by
end-2014. It expects to resume bauxite exports in the second
half of 2014, after getting a break from the Indonesian
government because it is building a refinery.
But other firms, faced with high costs and regulatory
uncertainty, are not rushing in.
Paul Adkins of AZ China said China may be able to secure
enough bauxite to scrape by before smelters are built to allow
Indonesia to export alumina, which could be within two years,
depending on how much infrastructure is in place.
But with London Metal Exchange prices stubbornly mired at
4-1/2 year lows around $1,720 a tonne, some believe
markets appear to be underestimating the impact on supply.
"(The ban) doesn't just question the expansions in China, it
actually threatens the existing industry as well," said
London-based BNP Paribas analyst Stephen Briggs, warning that
expectations the Indonesian government will retreat could
"To me, the market is putting too low a probability on it."