Bauxite and nickel exports to gain from restrictions

Indonesia's push for miners to add value through further processing of bauxite and nickel ores has given struggling Australian producers something to smile about.

The hope is that Indonesia's push could lead to higher prices for bauxite-alumina and nickel ores as exports from Indonesia are halted or restricted. Indonesia accounts for 15 per cent of world bauxite supply and 23 per cent of nickel supply.

The prices for both commodities and alumina have been under severe pressure thanks to global economic uncertainty caused by Europe's debt woes.

But Indonesia's value-add actions, initially dismissed in commodity markets as "noise", are starting to have a telling effect. Last week China's biggest aluminium producer Chalco, said it had been forced to slash its annual alumina production capacity by 1.7 million tonnes because of Indonesia's restrictions on bauxite exports.

Indonesia accounts for about 80 per cent of China's imports. Should the Indonesian ban continue in the long run, Australian exports of bauxite and alumina stand to benefit. A similar situation is panning out with nickel, with Indonesia supplying about 60 per cent of China's nickel pig iron industry needs.

The Chinese have built up a big nickel industry based on imports of low-grade laterite nickel ores from Indonesia and elsewhere from which a nickel pig iron product is produced. The process is particularly profitable when nickel prices are at $US12 ($12.10) a pound and the Chinese industry responds accordingly by ramping up production -- creating a cap on nickel prices in the long term.

As it is, nickel prices have crashed to $US7.35 a pound on Europe concerns. But Indonesia's actions are also tipped to create a squeeze on the Chinese nickel pig iron industry, possibly driving prices for Australian producers higher. In a research note, analysts at Citi said the outlook for nickel was "significantly more positive" thanks to Indonesia's moves to limit and tax ore export flows. "Expectations of reductions in exports range from 20 per cent to 75 per cent by the fourth of 2012," Citi said.

It said official ore exports had stopped since May 6. "All miners/ore exporters are required to submit investments plans for the building of ore processing plants in Indonesia. While plans are being scrutinised, all exports have been forbidden," Citi said.

It said that the Indonesian authorities wanted to maximise the value-add to the country's natural resources.