Indonesia bauxite tax disrupts Asia aluminium

　　Reuters reported that Indonesia's imposition of an export tax on 14 minerals is disrupting Asia's aluminium markets but the news for producers outside China may not be all bad.

　　The most obvious distortion is the ramping up of Chinese imports of bauxite from Indonesia in the months prior to the tax being imposed. Bauxite is the main ore for alumina which is used to produce aluminium and Indonesia is the major supplier to China.

　　Indonesian shipments of bauxite to China jumped 63% in May from the prior month to 5.56 million tonnes and they are up 55% year to date at 20.69 million. This represents 84% of China's total bauxite imports, and dwarfs the 3.6 million tonnes bought from Australia, the number two supplier.

　　There is obviously an element of Chinese buying ahead of the 20% Indonesian tax that started last month and it's likely shipments from Indonesia will start to decline from June. However, they won't collapse, given the absence of other suppliers capable of meeting the volumes China needs. It's also worth noting that there is still confusion over the export tax with the government yet to spell out on what price the 20% will be calculated.

　　The new impost also doesn't apply to all miners, exempting those with a Contract of Work agreement which are generally bigger companies. The tax is also just a step on the way toward a planned total ban on mineral ore exports in 2014 with miners being required to process output domestically. Nonetheless for now, the Indonesian export tax will have the likely effect of increasing costs for Chinese aluminium producers.

　　Looking at the May trade figures, China paid USD 43.06 per tonne for Indonesian bauxite and USD 55.63 for Australian. Assuming the worst case for the Chinese and that Indonesian prices rise by the full 20% that would take the price to USD 51.67 per tonne still cheaper than supplies from Australia but also enough to drive higher the costs of producing alumina and then aluminium.

　　According to National Australia Bank, given that China already has some of the highest cost aluminium producers it's possible that more capacity will have to be shut down in coming months. As much as 700,000 tonnes of annual capacity has already been idled in Henan, China's leading aluminium province.

　　Henan's producers tend to user older, more energy intensive methods, making them vulnerable to cost pressures. While some of this lost capacity has been made up by more output from newer facilities, China's imports of primary aluminium have continued to grow strongly, rising 147% in the first 5 months to 261,038 tonnes over the same period in 2011.

　　State backed research firm Antaike said that the chances are that despite a slower economic growth rate in China, aluminium imports will remain resilient, especially with Chinese alumina firms cutting output. China's top five alumina producers including Aluminium Corp of China, will trim output by 10% from this month because of changes in bauxite imports. If that is the case, imports of alumina should also remain robust.

　　They are up an annual 129% in the first 5 months of 2012 to 2.159 million tonnes with Australia supplying 85% of China's needs. It's Australia's bauxite; alumina and aluminium producers who stand to benefit the most if Chinese demand does hold up.

　　Whether this will be enough to prevent more shutdowns in Australia, where Norsk Hydro has idled a 120,000 tonne a year plant and producers including Rio Tinto and Alcoa have put operations under review, remains to be seen. Much will depend on the aluminium price, which has now fallen to the lowest since October 2009, with London three month metal at USD 1,865.50 per tonne down almost 21% from its high in 2012.

　　The current price means that the arbitrage window to sell into China is open which may help lower cost producers by at least allowing them to sell volumes even at weaker prices. It would be a brave call to say aluminium prices can't fall further, especially given the gloomy economic prognosis for Europe and clouds over China and the United States. But aluminium it is one of the few markets where Chinese producers will feel pain more quickly than many of their global counterparts.