Metals Commentary: Indonesia export ban crimps China’s bauxite supply: Wood Mackenzie

The following is an edited commentary by U.K.-based metals and energy analysts Wood Mackenzie.

In light of the Indonesian mineral ore ban that came into force on Jan. 12, 2014, we believe the aluminum industry — particularly in China — faces a challenge to address a growing shortage of the raw material bauxite, an aluminum ore.

It poses a compelling question for China — the world’s largest aluminum producer and consumer — with its alumina refinery production forecast to rise by almost 17 million tonnes by 2018 and a further 40 million tonnes by 2030. We estimate China will need access to an additional 130 million tonnes of bauxite over 2013 levels and expect China to consume as much as 240 million tonnes of bauxite by 2030.

 Until now Indonesia was the main supplier of bauxite to China, accounting for around 65% of overall supply in 2013. However, the mineral-ore export ban that came into force in January created a significant supply gap for China to fill. We believe the ban could be transformative to the global bauxite market in the longer term, but in the short to medium term the impact will be less significant due to swollen stockpiles and source diversification.

China is the main global player in the aluminum market, representing between 40% of supply and 60% of demand. Our most recent forecasts indicate that global alumina refinery production will rise to almost 140 million tonnes by 2018, which means we’ll see bauxite demand rise by almost 80 million tonnes to 350 million tonnes. With China’s alumina demand set to increase so sharply, there will be huge implications for bauxite demand. We estimate China will need access to as much as 240 million tonnes of bauxite by 2030 and, as it only produced 72 million tonnes domestically in 2013, huge uncertainty remains over the import versus domestic supply mix.

 Where will China now source its bauxite from? Undoubtedly if Indonesia sticks to the ban in the longer term, China will have to look to alternative import sources or develop new mines domestically.

However we suggest that China has in fact been making moves to diversify supply for some time in preparation for the ban. In recent years we’ve seen China sourcing additional quantities of bauxite from a variety of other countries, most notably Australia and India, and while the alternative sources are not supplying huge volumes to China currently, in time they could do.

 We believe that China has been actively increasing imports of bauxite since the mineral ore ban was first mooted in 2009. This is a strategic move by China to ensure it can firstly meet the direct needs of the coastal aluminum refineries it’s built up over the years, but secondly in preparation for the ban coming into force. We estimate that China has accumulated more than a year’s worth of bauxite supply. This works out at about 40 million tonnes, or four-fifths of the entire volume of bauxite exported by Indonesia in 2013.

Ultimately China’s vast bauxite stock piles mean that in the short-term at least, there won’t be any immediate impact on metal production. This strategic effort on China’s part has ensured the breathing space required to either develop new bauxite mines domestically, or establish new sources of supply through imports. 

One viable option that China is exploring is the use of coal fly ash. By investing in the development of new technology to extract alumina from the by-product (which occurs when burning coal for power generation) China could significantly reduce its bauxite requirement, but then again if it doesn’t produce enough, it will still have to explore other options.

 There are plenty of opportunities to develop bauxite production domestically and elsewhere in the world, and we suggests that three major basins in Guinea, Australia and Vietnam could more than meet China’s needs, but there are significant challenges to be overcome.

China could put all of its eggs in these three baskets, but its history of diversifying supply would suggest otherwise.

China does have options, but they come at a price. Developing new bauxite sources in other parts of the world will require significant investment, as host governments don’t just want mines, they want added value in the form of refineries and smelters.

There are also the high-cost hurdles of resource nationalization, surrounding politics and developing infrastructure that China will have to negotiate in order to establish new trade routes.

The big question is, will China look to these alternative sources and significantly increase imports or will it develop its own domestic resources to meet its insatiable demand? One certainty is that there are many opportunities for host governments open for China’s business.

— Wood Mackenzie is a global leader in commercial intelligence for the energy, metals and mining industries. The firm provides objective analysis and advice on assets, companies and markets, giving clients the insights they need to make better strategic decisions.

Wood MacKenzie’s aluminum specialists include Julian Kettle, head of metals and mining research, and Carl Firman, aluminium analyst.

For more information visit: www.woodmac.com