Indonesian Bauxite Tax won't have Long-Term effect on Chinese Aluminum Market

The impact of Indonesia’s 20% tax on bauxite exports will have a minimal impact on the Chinese aluminum market long-term and the market is already starting to adjust to the higher cost, said a Beijing-based metals consultancy.

Indonesia plans to slap a 20% tax on mineral ore exports by 2014, including bauxite. The nation produces 15% of the bauxite ore and 40% of the Chinese-made aluminum industry uses the ore. There are worries in the industry that this tax will hurt Chinese aluminum makers. However, Paul Adkins, managing director of Beijing-based metals consultancy AZ China, said analysis his firm has done suggests that these concerns are overblown.

China, he said, stepped up its imports of bauxite during March, April and May when it was still unclear what Indonesia would do regarding its bauxite exports. Second, China has cut back some production of aluminum because of a cooling economy, so less is being made, which has lifted prices. Third, he said the refineries that use the bauxite are highly profitable and sell the alumina – which is used in the production of aluminum – to their own plants.

“In the end, the tax will have a small impact on the cost of manufacturing in the long-term. A lot of the concern was the lack of clarity (initially). By year’s end, I think we will have forgotten about it,” Adkins said in an interview with Kitco News.

AZ China is releasing its first in-depth research book on China’s aluminum industry this week, which it calls the Red Book. It will be a quarterly issue, Adkins said.

There might be a silver lining in the Indonesian tax, he said, as it might make other bauxite producers more cost-competitive now.