Metals Commentary: Is a nickel export ban coming to Indonesia?

The nickel sector was caught a bit off guard in February when an Indonesian press report claimed the country’s government intends to enact its proposed ban on nickel ore exports from January 2014 to as early as May 2012. The ban, announced in 2009, seeks to encourage the processing of ore domestically into higher-value products by integrating nickel mines with a smelter to produce matte, ferronickel and nickel pig iron. The ban also aims to curtail uncontrolled, small mines that may be exporting material illegally and aren’t large enough to warrant their own processing facilities.

“Indonesia has its foot on the throat of the nickel industry,” says Andrew Mitchell, principal nickel analyst with U.K.-based energy and metals research firm Wood Mackenzie.

“The question is will they really do it, and I think everyone thinks that they won’t,”
Mitchell says. “The issue is that they don’t have the infrastructure. They haven’t got the rails or the power supplies, so building plants in Indonesia will be very expensive.” 

Mitchell also points out that there are no smelters under construction in Indonesia that could be finished before 2014. 

In a research note, the nickel analyst elaborates on the challenges the government would face: “A handful of Chinese companies are associated with [plans to build smelters in Indonesia], but the remoteness of many prospects and the need for infrastructure in order to develop them signals that achieving even a 2015 deadline would be a challenge requiring substantial investment,” he explains. 

“Suggestions that an export tax could be introduced in the interim are unconfirmed, although this option could be an acceptable compromise, with an outright ban following in later years,” he adds. “An alternative possibility is that joint-venture arrangements with Chinese nickel pig-iron companies could be established with an Indonesian mine supplying ore feed to a Chinese nickel pig-iron plant, and a share of the revenue generated from nickel pig-iron production being returned to Indonesia.”

If the ban goes ahead it would have a significant impact on China, which imported 53% of its nickel ore from Indonesia last year which it uses to make nickel pig iron, the Bloomberg news agency reports, citing customs data. Bloomberg also puts Indonesia’s 2011 nickel production at 15% of the world’s total — with its refined nickel output representing just 1% of the global output, according to figures from Barclays Capital.

Mitchell says uncertainty over the ban makes it hard to forecast nickel supply, demand and prices over the next few years. But he knows for certain that the sector is moving toward structural oversupply, with Ambatovy (60,000 tonnes per year), Tagaung Taung (22,000 tonnes per year) and Koniambo due to start up this year. VNC, formerly Goro at 55,000 tonnes per year, is ready to start producing nickel oxide sinter, and Barro Alto and Onca-Puma are progressing with ramp ups after switching on last year. The plants alone are expected to bring 300,000 tonnes of new nickel to market, or 16% of forecast worldwide finished nickel production this year.

“That’s a lot of metal for the space to absorb in such a short time,” he tells The Northern Miner. “Even with conservative ramp-up periods, we’re still looking at an oversupply situation and downward pressure on prices for the next four or five years.”

Mitchell forecasts nickel prices in 2012 of US$8.38 per lb. and US$7.89 per lb. in 2013. Last year the nickel price averaged US$10.39 per lb. But like all forecasts, there are many variables at play. If Indonesia proceeds with its ban in May — two years ahead of time — it is possible that a big portion of nickel pig-iron production could be lost in the next 12 to 18 months, he concedes.

“As 60-70% of nickel pig iron production is based on ore feed imported from Indonesia, such losses could have a profound impact on our future balances,” he notes in his report. “Equally, if looming oversupply pushes nickel prices down quickly and to a low-enough level to enforce the closure of marginal operations — which would also affect nickel pig iron — that too would tend to bring the market back to balance sooner than we show in our forecasts. And prices as low as $16,000 to $17,000 per tonne would be low enough to precipitate such reactions.

“Either scenario may allow prices to either remain higher or begin to recover sooner than we currently forecast,” he concludes. “Thus, although potential oversupply indicates that a fall in nickel prices this year may only be a precursor to still lower prices in 2013. There is also scope for greater optimism next year.”