Aluminium industry feels slow impact of bauxite ban in Indonesia

The delayed and more critical impact of mineral export ban in Indonesia is slowly being felt in the aluminium industry. London aluminium futures hardly gained up 0.6% over the same 3-day trading period and the benchmark contract in Shanghai also came down by 0.6%.

While Indonesia relaxed some of its bans on the export of raw mineral ores until a 2017 deadline for complete domestic processing, bauxite was not in the list.

Bauxite is the main raw material used for making alumina and this in turn is used to produce aluminium. Indonesian bauxite exports account for about 12 percent of global aluminium production, but this is not evenly spread.

One of the main buyers of Indonesian bauxite is China and a Goldman Sachs report on Dec. 5 has estimated that about 30%of Chinese aluminium capacity growth since the year 2007-08 has been produced making use of ore from mainly the Southeast Asian nation. Goldman Sachs points out that long before the ban actually came into force; Chinese have started stockpiling and are believed to have approximately 45 million tonnes of bauxite, which is enough to meet a whole year's demand. Chinese bauxite imports increased 81.8 % to 65.5 million tonnes in the first eleven months of 2013 compared to the same period last year. Indonesian exports made up the largest share of the figure, at 44.4 million tonnes and they were followed by Australia at 13.3 million and finally India at 5.01 million.

But Chinese won’t be comfortable using their stockpiles for a long period. The first six months of the year 2014 would be alright, what happens after that? It is assumed that Chinese will start looking for alternative supplies as they do not want to hamper their aluminium production. 20% of Indonesian bauxite production companies have been exempted from this ban based on pledges by miners for building downstream facilities.

Even if 20% of Indonesian bauxite makes it to the world markets, it still leaves a big hole in supply, especially for the Chinese. Assuming that the year 2012 has been quite good for Chinese when it comes to bauxite imports, it shows the purchases of 39.6 million tonnes, that was down 11.3 percent from 2011, of which 27.9 million, or about 70 % was sourced from only Indonesia.

It thus seems that China will be looking for something more than 20 million tonnes of bauxite per year once its stockpiles starts getting over. But there will be a rise in cost as Indonesian bauxite was 9.4 % cheaper than Australia and a huge 37% below the cost of supplies from Brazil according to China's November.

China may also cut down some of the existing aluminium capacity they have or scale back the planned expansions. This would further serve to lower global capacity surplus. Chinese capacity surplus have been the reason for the closure of higher-cost operations in Russia, Australia and Europe, so far. But we might witness a change now, especially if Chinese aluminium producers start losing some competitiveness due to the scarcity of cheap Indonesian bauxite.