What impact will the relaxation of Indonesia's bauxite export ban have on alumina and Shanghai aluminum prices?

Indonesia has superior mineral endowment. According to USGS data, Indonesia ranks among the world's leading mineral powers with its diversity and high reserves of metal minerals. The local bauxite reserves are 1 billion tons, accounting for 3.19% of the world's total proven reserves. Mining has always been one of Indonesia's important economic pillars. In 2022, Indonesia's GDP grew by 5.3% year-on-year, setting a new record, of which mineral resource mining accounted for 7.3% of GDP. Under the leadership of the current President Joko, Indonesia proposed a 20-year long-term development plan, which emphasized the important role of downstream industries in the leapfrog development of the economy, proposed to increase Indonesia's FDI and foreign investment, and reduce direct exports of minerals. After June 2023, Indonesia will implement a ban on bauxite exports, and local investment will be attracted to develop a localized alumina processing industry chain.

In 2024, the Indonesian Election Commission announced the results of the vote count-72-year-old Prabowo was officially elected as the next president. Prabowo's leadership style is completely different from that of the current President Joko Widodo. In the recent election debate, his arguments mainly focused on promoting economic growth and improving people's living standards. Foreign media speculated that he would "almost certainly" overturn previous policies, including the 23-year-old Indonesian ban on mineral exports. According to Bloomberg, the director of the Mineral and Coal Department of the Indonesian Ministry of Energy and Mineral Resources said that the Indonesian government is considering relaxing the ban on bauxite exports and is expected to adopt a quota system for exports.

According to SMM, Indonesia's bauxite production in 2022 is 21 million tons, and Indonesia-China exports of bauxite are 19.07 million tons, accounting for 15.2% of the country's total imports. After Indonesia implements the bauxite ban in 2023, the total amount of bauxite exported from Indonesia to China in that year dropped sharply to 1.85 million tons, accounting for 1.3% of the country's total imports. As can be seen from the figure below, since Indonesia banned the export of minerals, my country's bauxite imports have mainly relied on Guinea and Australia for transportation, and the price of imported bauxite has continued to rise and is lucrative. The local alumina projects invested in Indonesia's early investment promotion currently have a production capacity of 4.3 million tons, and the capacity to be put into production is 13 50 tons (expected to be put into operation in 2026), the local electrolytic aluminum plant is in production with 520,000 tons and 4.25 million tons to be put into production. According to the ratio of bauxite: alumina: electrolytic aluminum = 4.05:1.93:1 (calculated based on the ratio of 2.1 tons of bauxite to 1 ton of alumina and 1.93 tons of alumina to 1 ton of electrolytic aluminum), if calculated based on Indonesia's 21 million tons/year bauxite production capacity, the current alumina plant in production needs to consume about 9 million tons of bauxite locally, and the remaining 12 million tons are still surplus. Under the current high profits of imported ore and the slow pace of subsequent alumina plant production, it is highly likely that Indonesia will relax its bauxite export quota.

So if Indonesia relaxes its bauxite exports, what impact will it have on the market? First of all, the domestic supply of bauxite continues to be tight. Although some production has resumed after the reduction and suspension of production in Shanxi and Henan in the early stage, the domestic downstream alumina and electrolytic aluminum are operating at high capacity and demand is strong. Under the condition of continued sluggish domestic mineral production, the demand for imported minerals has further increased. In Guinea, which has recently entered the rainy season and barge shipping is difficult, the import price of bauxite has been rising steadily. If Indonesia relaxes the import of bauxite, the import channel will "go far and seek near", and the import supplement of tens of millions of tons will effectively alleviate the shortage of mines in my country and guide the production costs of alumina and electrolytic aluminum to decrease. We can see this from the long-term price of alumina futures. The BACK term structure shows that the forward marginal easing of mine supply has compressed the cost of alumina, and the same logic is also transmitted to the Shanghai aluminum price. Although the support on the cost side has weakened, resulting in the imagination of price decline, considering the upcoming golden September and silver October consumption peak season, it is expected that before October, the prices of alumina and Shanghai aluminum will still have strong support below.

Analyst at Guangzhou Futures Research Center: Xu Keyuan