How a recent Indonesian export ban will affect the price of nickel
The Indonesian government has proposed a ban on export shipments of unprocessed nickel ore, which is currently shipped to China to make nickel pig iron, an inexpensive substitute for higher-quality nickel used in stainless steel.
This new legislation is due to take effect on January 1st, 2014 and could spell disaster for many mining companies which have operations within Indonesia. One key knock-on effect of this potential ban is a steep increase in the price of nickel ore in recent weeks. It had reached a four-year low early in October, due to over-supply, but has now started to rise significantly on the London Metal Exchange.
If the ban goes ahead, market pundits are predicting a rally in the nickel market of up to 30 per cent. Daniel Smith of Standard Chartered described it as ‘an important swing factor… crucial for the Chinese nickel pig iron sector’. Stephen Briggs, strategist at BNP Paribas, foretells disaster for the industry in China, stating that ‘large swathes’ of it would have to close down.
Problems for China
WoodMackenzie consultants stated that around 60 per cent of China’s ore imports are brought in from Indonesia. This new law would mean that ores such as nickel and other metals and minerals are processed within Indonesia before being exported. The idea behind the law is to boost profits and encourage foreign investment, but some analysts feel that Indonesia does not have sufficient capability to process the massive amounts of ore produced in the country, so this plan could backfire.
There is a current surplus of approx. 78,000 tonnes of nickel ore within the market but this would not last long if the ban is implemented. China has increased its own stockpile since August 2013 but this cannot last forever. They could try to look elsewhere for their nickel ore, to sources such as the Philippines, but the ore produced there is not of as high a grade as that from Indonesia.
Brazil and the Dominican Republic also produce large amounts of nickel ore but they have experienced production problems, according to Merrill Lynch Global Research in a recent report. Russia and Finland could also step in to make up the shortfall, but that would mean expanding their current sites significantly, which takes time and investment and is not an easy task.
Not a Foregone Conclusion
There is some uncertainty on the horizon, though. The Energy and Minerals Resources Ministry has been speaking to lawmakers with a view to possible revising the ban. So although the current threat is causing a spike in nickel ore prices, this may not last. If the ban is shelved or revised sufficiently, prices could return to a more stable level in the not so distant future.