COLUMN-Indonesia bauxite ban slow-burn issue for aluminium – by Clyde Russell (Reuters U.S. – January 14, 2014)

Clyde Russell is a Reuters market analyst. The views expressed are his own.

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.

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