-- Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 15 (Reuters) - 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 smelting capacity.
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.
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 Australia.
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)