Indonesia export rules to push up costs for bauxite, nickel, copper ore

New Indonesian export rules to take effect in January next year will result in higher costs for bauxite, nickel and copper ore, according to Barclays Capital. Metal ore export volumes from Indonesia are of global significance, so any hindrance to these flows would affect LME prices, the bank said in a note. In accordance with the 2009 mining law, producing mines in Indonesia will be subject to an ore export ban from mid-January 2014. "Since Indonesia is one of the most significant global exporters of bauxite, copper ore and nickel ore, the prospect of a hard ban or even a more constrained export dynamic cannot be considered a trivial outcome," Barclays said. Indonesia accounts for close to 60% of total Chinese nickel ore imports and is "essentially the sole provider of the high grade ore upon which the RKEF NPI sector depends," according to Barclays. "In 2013, we expect RKEF NPI output to hit 223,000t refined nickel content, which is significant in the context of a projected 111,000t global market surplus for this year," the bank said. Copper contained in ore exported for processing from Indonesia is expected to be almost 260,000t in 2013, "compared with our forecast for a 111,000t global market surplus." TRANSITION However, Barclays does not believe the hard ban on exports will be enforced as planned. First, producers are skeptical about the application of the law and there has been a lack of incentive towards domestic divestment rules, under which foreign companies must reduce stakes in mines to 49% after 10 years. This has resulted in "a dramatic shortfall of required investment in processing capacity with the prospect of a significant mineral export flow disruption." "Secondly, Indonesia's current macroeconomic woes indicate any policy that would sharply cut export revenues as counterintuitive," the bank said, adding that 2014 is an election year. The likely outcome is a transitional phase, with exemptions granted on a case-by-case basis, according to Barclays. Nickel smelting and bauxite refining facilities have been planned, but their actual construction remains in doubt "given the infrastructure bottlenecks... in terms of transport capacity and power supply," Barclays said. EXPORT TAX HIKES Under the transitional scenario, Barclays believes it is likely that the current 20% export tax for ore will see a "significant" increase. "A rise as high as 60% has been suggested as likely in the event that the majority of ore producers are given exemptions based on processing capacity construction," Barclays said. "Ultimately, this means that even under the likely transitional application with limited quantitative constraint on ore exports, ore prices will still rise, which will affect production costs in respective sectors." TIN At the same time, regulations on purity standards, which came into force on July 1, have hit the tin market. Refined tin exports fell to an average of 6,500t/month in July and August, compared with a 9,200t/m average in H1 due to the purity standards. To make matters worse, PT Timah, the world's third largest producer, declared force majeure at end-August due to a shortage of customers registered on a domestic exchange. "An even more significant cut on tin export flows is expected while that situation is resolved," Barclays said.