Indonesia’s unprocessed ores and minerals export regulation: boon for large bulkers, but bane for smaller segments
Indonesia’s ban on exports of unprocessed ores and minerals will result in reduced nickel ore trade, hurting the demand for small bulkers. However, with bauxite trade shifting to Guinea-China from Indonesia-China, large bulk carriers will gain employment.
The Indonesian government has decided to bring forward to early 2020 its plan to ban exports of nickel ore. Anticipating a shortage of nickel ore from 2020, Chinese stainless steel producers will speed up their inventory build-up, which will result in strong nickel ore trade on Indonesia-China until the end of 2019. However, in the long term, the ban will be detrimental for nickel ore trade as it will be difficult for Chinese consumers to find alternate sources of nickel ore.
For the moment, the Indonesian government has not announced any plans to bring forward a ban on bauxite exports but even if the government chooses to do so, the impact on overall trade will not be significant. It will be easy to replace Indonesia with Guinea sourced bauxite, though it will increase the average haulage length.
The Indonesian government had imposed a similar ban in 2014 before partially lifting it in 2017. In the run up to the proposed ban, Indonesia’s nickel ore exports skyrocketed and in 2H13 the country exported an additional about 10 million tonnes of nickel ore than in 2H12. This translated into a monthly increase of more than 1.5 million tonnes. If the present ban has a similar impact, Indonesia’s exports will increase by 6-7 million tonnes over the next four months.
China accounts for more than 96% of Indonesia’s exports, and we do not foresee any major change in trade patterns. As it takes about 20 days for a Handysize vessel to complete a round voyage between Indonesia and China, an increase in Indonesia’s exports before the ban will create additional demand for 30-35 more Handysizes over next four months.
However, by 2020 with practically no nickel ore moving from Indonesia, we estimate 40 Handysize vessels will lose employment – a trend that will continue in the long term.
Indonesia is the second largest exporter of nickel ore in the world, accounting for 37% of global nickel ore trade in 2018. After the ban is imposed, we believe it will be challenging for other major exporters such as the Philippines and New Caledonia to fill the huge void created by the ban. In 2014, when Indonesia imposed a similar ban, global nickel ore trade nosedived 34% and by a further 67% in 2015. But as all the other major suppliers of nickel ore are close to Indonesia, there was no significant change in terms of tonne-mile employment.
However, if the ban on bauxite exports is implemented it will have a major impact on tonne-mile employment. Indonesia exports most of its bauxite to China, and if Indonesia decides to ban bauxite exports from 2020, China will replace Indonesian bauxite with bauxite from Guinea. Already, production is being ramped- up at Guinea’s existing mines and new mining facilities are due on steam. For example, China’s Chalco will commence mining from its Boffa project by the end of 2019. At full production 12 million tonnes of bauxite will be mined annually at Boffa.
A shift in bauxite trade away from Indonesia to Guinea will increase average haul lengths on bauxite trades as the distance between Guinea and China is more than 10,800 nautical miles compared with only 2,300 nautical miles between Indonesia and China.
In 1H19, Indonesia exported seven million tonnes of bauxite to China, which resulted in 16 billion tonne-miles of shipping demand. However, a mere 1.5 million tonnes of trade between Guinea and China would be enough to generate the same level of demand.
The gainers here will primarily be large bulkers, as traders prefer Capesize and Kamsarmax vessels on the Guinea-China route, as opposed to Supramaxes and Handysizes on Indonesia-China.