The effects of nickel ore and bauxite export bans could linger

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Nickel ore and bauxite

As minor bulks, nickel ore and bauxite generally carry less influence over dry bulk shipping companies such as Navios Maritime Holdings Inc. (NM), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Star Bulk Carriers Corp. (SBLK), as well as the Guggenheim Shipping ETF (SEA). But when the monthly imports drop almost 10 million metric tonnes, they become a big deal.

Aside from coal, Indonesia is also a key supplier of nickel ore and bauxite to China. Nickel ore from Indonesia is used to produce nickel pig iron, a feed stock for stainless steel, and bauxite is used to make alumina and aluminium. In an effort to promote investment in refining and processing plants, the Indonesian government decided to ban exports of unprocessed commodities. Consequently, China’s total imports of nickel ore and bauxite fell more than 50% during the first four months of this year.

Negative implications

The Indonesian government seems pretty adamant about leaving the policy unchanged. While some investments are going into these refining and processing plants, it appears Indonesia lacks the infrastructure (electricity, for example) to support such initiatives at the moment. Consequently, exports of nickel pig iron and alumina won’t help shipping rates anytime soon.

It’s also hard to replace Indonesia’s nickel ore, because its ore is of a low grade used to produce nickel pig iron, extracted from lateritic nickel ore deposits. Although the Philippines’ nickel ores are also low-grade, the ores are slightly different in metal composition, and producers don’t intend to increase supply.

Bauxite imports could increase over time as China seeks resources from other countries—particularly from Australia, which is currently the largest producer of the commodity. Keep in mind that whether Australia can increase its output and whether China would pay for it is another question.

With Indonesia having no intention of reversing its policy and few alternatives, year-over-year growth will likely continue to fall until the end of 2014. This could continue to pressure year-over-year growth in shipping rates, and possibly dry bulk shipping companies, until the end of 2014.

Check back with Market Realist at the end of June for a sequel to this series.

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