It’s called a supply-side surprise and unless the sometimes erratic government of Indonesia changes its mind by Monday, WA’s beleaguered nickel-mining industry could receive a welcome boost.
It’s called a supply-side surprise and unless the sometimes erratic government of Indonesia changes its mind by Monday, WA’s beleaguered nickel-mining industry could receive a welcome boost.
What’s supposed to happen, and world metal markets do not appear to believe it will, is the introduction of a ban by Indonesia on the export of unprocessed ore such as low-grade nickel laterite and bauxite used to make aluminium.
With the clock ticking on a policy first announced as far back as 2009, the clues being picked up by observers of activity in Jakarta suggest the government is determined to push ahead with its controversial policy, perhaps with a few last minute adjustments.
All minerals currently shipped out in an unprocessed state are supposed to be caught by the new laws which are designed to encourage value-added processing as a way of maximising the country’s income from its mineral wealth, as well as create skilled processing jobs.
But until now the proposed changes seemed to be an exercise in political grandstanding, with none of the major exporters taking the necessary steps to build expensive processing plants in the belief that the money would be wasted because the government will back down.
While a last-minute change is considered likely for some minerals, such as copper currently exported as a part-processed concentrate rather than fully-processed metal, that is not the case with nickel ore and bauxite which leave Indonesia in their natural, unprocessed state for conversion to metal in China.
Two markets support the “nothing will happen on Monday” side of the argument. The nickel price on the London Metal Exchange (LME) has fallen over the past few weeks even as the Monday export-deadline approaches, while the price of WA’s best-known nickel mining stocks have also risen and then retreated.
Set against this collective yawn from the markets are persistent reports from Jakarta that claim this time the government is determined to force greater investment in mineral processing even if it means short-term pain from reduced export income and tax revenue.
Signs of a government backdown can be detected in comments attributed to the Indonesian director general of minerals, Sukhyar, who said that companies which upgrade their minerals to concentrate stage will get a reprieve until 2017.
However, any extension of the deadline is likely to only benefit copper and gold producers such as Newmont and Freeport-McMoRan.
Nickel and bauxite ore seem likely to be hit by a full ban immediately and if that happens, interesting things could start to occur on the LME and the Australian stock market.
For WA, it’s the nickel situation which should be watched carefully because a ban by Indonesia on unprocessed exports could hurt what has quickly become the world’s biggest single source of nickel thanks to the invention of a part-processed Chinese product called nickel pig iron (NPI) which is made from Indonesian ore and used to make stainless steel.
Stockpiles of NPI and unprocessed ore have been building up in China ahead of the proposed Indonesian export ban, a development which could help explain the nickel price slipping from close to $US6.50 a pound just before Christmas to $US6.12/lb last night.
Local pure-play nickel stocks such as Western Areas and Mincor Resources have seen their share prices firm over the past month only to ease slightly as the Indonesian deadline nears.
Western Areas has risen from as low as $1.94 in early December to recent sales at $2.38, down marginally on the $2.45 reached last week. Mincor is up from 49c in early December to 57.5c, a price which is also down from last week’s high of 59.5c.
The December rise by the local nickel miners largely reflects a rise in the LME nickel price, as does the recent fall.
The question which adventurous investors need to consider is what might happen should the Indonesian export ban actually be enforced, triggering a genuine supply-side surprise in the global metal market.
A shortage of either nickel or bauxite will not occur overnight, but the signal sent by an export ban is potentially quite powerful and could be the tonic needed to stimulate an overdue revival in the WA nickel sector.
