Indonesia curbs unprocessed metal exports: No impact

Emkay Global Financial Services has come out with its report on metal sector.

Indonesia announced curb on unprocessed metal exports earlier this week- These came with couple of clarifications and riders. We did not see the overall announcements as having any material impact on the global mining- metal space at least in the near term. We also spoke to an industry veteran Mr. Arun Kumar Sharma who endorsed our views.

Indonesia mining ban:

• Mining companies which were given license after 2009 to be banned from export of unprocessed metals (14 minerals) with effect from 6th May 2012
• Those having license from prior date will continue to export till 2014
• Companies need to give a plan of investments in the value added space, till then they can export on payment of 20% tax

Metal dynamics- Indonesia, China, India:

• Indonesia ranks 11th in terms of bauxite reserves globally, however possibly 5th in terms of bauxite production. Almost its entire production of 40 mt is exported, 85% of which is to China. Indonesia has two projects aggregating to 1.5 mt of alumina production per annum which are scheduled to get completed only after 3 years. The possibility of Indonesia being able to consume the bauxite captively is remote at least for next few years.
• China is the leading producer of metals contributing 35% to 45% of global production across various metals. Its aluminium production during CY2011 was 18.4 mt (global production of 44.5 mt) and consumption was 18.8 mt (Global consumption of 44 mt). About 35% of China’s bauxite requirement is met through imports which are largely from Indonesia.
• India ranks 5th in terms of its bauxite reserves and resources. Its major producers (Hindalco, Nalco & Balco) too have captive mines for their alumina requirement. Vedanta aluminium has still not got clearances for the mine and is sourcing almost 50% of its alumina requirements from external sources. However no imports of bauxite happen from Indonesia.

Our take- no significant impact: 

• The spot price of Indonesian bauxite has been $32 to $37 per tonne. With the introduction of 20% export tax, the spot prices of bauxite could increase by $6-8 per tonne. As a result of this, the smelter which sourced bauxite entirely from Indonesia could see its aluminium production cost increase by $25 to $50 per tonne of aluminium metal. It may be noted about 2-3 tonnes of bauxite (depending on ore grade) are required for producing 1 tonne of alumina and subsequently 2 tonnes of alumina are required for producing 1 tonne of aluminium metal at the smelter.
• The impact of the proposed change would only be on Indonesian mines or the Chinese smelters sourcing their bauxite requirement from Indonesia. Indian producers will largely be immune to the proposed change. If at all the fully integrated aluminium producers could have a mild advantage as the aluminium prices would find support at current levels. The current spot price of Aluminium on LME is $ 2050 per tonne and at this level it breaches the marginal cost of production for more than half the smelters globally.
• Changes in the coal export policy and taxes from Indonesia could have a bearing as India does import large quantities of coal from that geography.

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