(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, May 22 (Reuters) - Indonesia’s ban on the export of unprocessed minerals has been in force for more than four months, cutting off flows of nickel ore and bauxite to China.
The impact on the nickel price has already been huge.
On the London Metal Exchange (LME), three-month metal has staged a spectacular rally up and through the $20,000 per tonne level. Some of the short-term speculative froth has since blown off but at a current $19,750, the price is still up more than 40 percent on the start of the year.
The bullish betting is that it is only a matter of time before Chinese nickel pig iron (NPI) capacity starts closing, lifting the country’s requirement for higher imports of refined metal.
The effect on the aluminium market has been more muted, so far at least, although the bullish implications were neatly summed up by the headline in Thursday’s Financial Times: “Indonesia bauxite ban set to boost aluminium”.
But what do China’s trade patterns tell us about the effects of the ban so far?
In both cases, it is evident that Chinese importers are attempting to tap alternative sources of supply.
And in both cases, it is clear that there has been a displacement effect on imports of intermediate products but not yet on refined metal.
Chinese imports of Indonesian nickel ore have slowed to a trickle, just 299,000 tonnes in April.
Since no nickel ore has left Indonesia at all since January, according to figures from the country’s central bank , this material has either been on a particularly slow boat to China, or is a case of mistaken identity, nickel-rich iron ore perhaps.
The trend, however, is indisputable. April’s tally was the lowest monthly total since March 2009.
And so far there has been no offsetting increase in imports from the Philippines, China’s other main source of nickel ore in the past.
Cumulative imports of ore from the Philippines totalled 4.7 million tonnes in January-April, flat relative to the first four months of 2013.
This may well be due to seasonal factors. Flows to China have noticeably dropped over the first few months of any given year before accelerating over the second quarter.
Nor are there yet any signs of compensatory imports from New Caledonia or Guatemala, both identified by analysts at Macquarie Bank as potential alternative sources for Chinese NPI producers. (“Commodities Comment: The nickel story is just getting started”, May 16, 2014).
What has appeared in China's import figures, however, are new flows of raw material from Vietnam, Zimbabwe and Brazil, but concentrates rather than ore, judging by the dollar valuations, which range from $900 to $1,700 per tonne, compared with around $70 for ore. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's nickel ore imports: link.reuters.com/qen59v Graphic on China's net nickel trade: link.reuters.com/tym59v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
In terms of import changes down the nickel value-add chain, the real impact of the Indonesian ban has so far been on ferro nickel rather than refined metal.
China’s ferro nickel imports more than doubled to 105,000 tonnes in January-April.
In terms of origin country, the stand-out was New Caledonia, imports jumping to 19,400 tonnes from 3,400 tonnes in the same period last year. This may of course partly reflect improved supply, given the start-up of Glencore’s Koniambo project.
Sharp increases in imports from Japan and Brazil have also taken place, while Chinese importers appear to have tapped a new source in the form of Myanmar.
Imports of ferro nickel from that country were 5,172 tonnes in April, bringing the year-to-date total to 6,269 tonnes.
There has not yet been any noticeable change of trend in China’s demand for refined metal.
Indeed, imports dropped 14 percent over the first four months of this year and, factoring in a continued strong export flow, net imports fell by a sharper 35 percent to 34,600 tonnes.
This pattern is to be expected, since it makes more sense for China’s stainless mills to source lower-value ferro nickel replacement units for lost ore.
That said, nickel’s bull story will gain more traction when refined metal import patterns start changing. Watch this space.
China’s imports of Indonesian bauxite were precisely zero in April, leading to a 29 percent drop in total imports to 14.5 million tonnes over January-April.
Imports from the two most obvious replacement sources, Australia and India, have yet to react. Those from Australia were pretty much unchanged in the first four months of the year, while those from India fell sharply to 335,000 tonnes from 2.3 million tonnes last year.
But it is clear that Chinese importers are looking elsewhere as well for alternative supplies, particularly West Africa and the Caribbean.
New names on this year’s roster of origin countries include Ghana, complementing Guinea, which first appeared as a significant source of bauxite supply last year, and the Dominican Republic.
This greater geographical diversity of sourcing is already starting to affect bauxite prices.
Analysts at AZ China, for example, note that the imported bauxite price jumped over 10 percent month-on-month in March due to higher freight costs, a trend worth watching in terms of flow-through to aluminium costs. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's bauxite imports: link.reuters.com/gym59v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
As with nickel, however, the real impact of the Indonesian ban is evident in another intermediate product, alumina in this case, rather than on refined metal imports.
Alumina imports rose by 53 percent to 2.1 million tonnes in January-April.
Australia accounted for 1.6 million tonnes of that total with imports rising by 17 percent.
As with bauxite, however, the really interesting development is the diversification of supplier.
Imports from Vietnam, for example, were 144,000 tonnes in the first four months of this year, already exceeding total imports last year.
China also received its first shipments from Jamaica since April 2012, while imports from India, an existing supplier, have exploded from 64,000 tonnes last year to 182,000 tonnes so far this year.
It’s true that net imports of primary aluminium have risen strongly this year relative to last but at 154,000 tonnes they are miniscule relative to the size of the Chinese market and far from extraordinary by historical standards. This year’s tally, for example, is less than that in the same period of 2012.
The overall impression is that the Indonesian ban is going to be a slow burn in the aluminium market, mitigated by the existence of alternative supplies of bauxite and alumina.
The bullish impetus will come from rising production costs, another headwind for the Chinese smelter sector, large parts of which are already loss-making. (Editing by Dale Hudson)