Material Matters: Indonesian Ban, Nickel, Iron Ore And Aluminium

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-Indonesia's ban likely to hold
-NIckel price surge continues
-Chinese iron ore to strengthen in H214
-fundamentals underpin aluminium
 

By Eva Brocklehurst

Indonesia has featured frequently in metals market news, after the country implemented legislation in January banning some metal ore exports. Although there have been reports the authorities are watering down the legislation, Morgan Stanley observes this is not the case. The broker points out that the "ban" was not a complete ban on all ore exports. Some semi-processed metals are allowed, subject to the purity of concentrates. This includes copper, lead, zinc, ilmenite, titanium, manganese and iron.

Export permits still need to be sought and meet certain conditions, such as a commitment to build a domestic processing facility, and meet ownership requirements. An annually escalating export tax will be applied at 20% this year, 40% in 2015 and 60% in 2016, with a complete ban applied in 2017 unless the miner has built or has firm plans for downstream processing. Those metal ores outside of these privileges are nickel, bauxite, tin, chromium, gold and silver. Morgan Stanley thinks there is little probability the law will be altered or overturned.

ANZ analysts believe the supply shock that sent nickel prices to a two-year high is far from over. The Indonesia ban has affected Chinese nickel pig iron production and around 300,000 tonnes of capacity, or 14% of global nickel supply, is expected to close. Since the ban was implemented, China's imports of nickel ore from Indonesia have ground to a halt, while imports from the Philippines have nearly doubled from 2013 levels, to 4m tonnes May. The lower grade of nickel in Philippines ore means it has not been able to compensate for the loss of Indonesian supply.

Stockpiles of unprocessed nickel ore at Chinese ports were estimated in the range of 20-30mt at the beginning of 2014, which analysts believe is around nine months supply. Hence, supply is expected to swing to a substantial deficit heading into 2015, for the first time in five years. In the long term, the analysts believe investment in Indonesia's plants is the only real option to bridge the supply gap. The price of nickel reached US$20,000/t in May and the analysts expect 2015 prices will average US$23,725/t.

Meanwhile, iron ore's fortunes have gone the other way. The price has fallen by over 20% since February and recently re-tested the September 2012 lows under US$90/t. This fall in price comes despite near-record levels of Chinese imports and blast furnace steel production. Major suppliers in the seaborne market have substantially increased production, more than offsetting increased demand. Bell Potter observes, should the usual seasonality prevail, Chinese domestic iron ore production will strengthen in the second half of the year and seaborne demand could come under further pressure in the September quarter.

Australia's three major iron ore producers, BHP Billiton ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)), have added around 170mtpa in capacity to the seaborne market in the last two years and now account for around half of total seaborne trade. Adding Brazil's Vale into the mix takes that to around three quarters of seaborne supply. Bell Potter calculates break even prices for 62% iron CFR China of around US$70/t for Fortescue. Break even rises to US$75/t for smaller producer BC Iron ((BCI)) and to US$80/t for Atlas Iron ((AGO)).

The cash aluminium price on the London Metal Exchange has increased by 12% since the beginning of 2014, trading above US$1,900/t and at its highest price in almost a year. JP Morgan thinks the increase in premiums is justified by market fundamentals. Emerging tightness is being driven by production curtailments in net exporting regions such as Russia, Australia, Africa, Brazil and Canada, and strong demand in importing regions such as the US and Europe.

The broker envisages two key risks to supply. Near term higher cash prices may attract spot inventory sales from both consumers and producers of the metal. A more medium term risk if higher prices persist is that smelters could be encouraged to re-start curtailed capacity. JP Morgan expects, for now, ex-China production will stabilise at current levels and there will not be significant exports of primary aluminium from China without further improvement in regional premiums.
 

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