Why Indonesia’s nickel ore export ban affects dry bulk shippers
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- Published on Saturday, 05 April 2014 14:53
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Why Indonesia’s nickel ore export ban affects dry bulk shippers
Indonesia: An export-led economy
Indonesia is the largest economy in Southeast Asia and also one of the largest emerging markets in the world. As a major producer and exporter of oil, gas, and minerals (including gold, nickel, copper, tin, and thermal coal), Indonesia’s exports account for a significant share of Indonesia’s GDP. In recent years, exports have been the key driver of economic growth in Indonesia. According to data from the World Bank, Indonesia’s exports of goods and services were about 24% of its GDP in 2012, and its main exports are coal briquettes, petroleum gas, palm oil, rubber, and crude petroleum. Indonesia’s top trading partners are Japan, China, the U.S., Singapore, and South Korea.
The recent ban on raw ore
On January 12, 2014, Indonesia—one of the biggest suppliers of natural resources—announced a ban on the exports of unprocessed ore. Government officials explained that the purpose of this ban is to increase the value added by Indonesia’s export products, and that they would like miners to build smelters and refinery facilities in this country to help promote domestic economic change. Although Indonesia’s government still allows exports of copper, iron ore, lead, and zinc, no relief is offered to nickel and bauxite. This ban could negatively affect Indonesia’s exports of nickel and bauxite, causing fluctuations in world nickel prices.
Mixed impact on dry bulk shippers
Since Indonesia supplies 50% of China’s nickel ore imports, this ban is quite a big deal. In this series, we’ll examine the impact of Indonesia’s export ban—particularly its ban of nickel ore—on shipping rates, the Guggenheim Shipping ETF (SEA), and dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).
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China’s nickel imports show the gravity of Indonesia’s export ban
China: The top nickel importer
China is Indonesia’s second largest trade partner. Laterite nickel, the mineral most affected by Indonesia’s ban on dry bulk shipping companies, is used to produce nickel pig iron, which in turn is used to produce stainless steel at cheaper costs than pure nickel. But regardless of whether the ban would have been imposed or not, China imported a large amount of nickel from Indonesia in 2013 in anticipation of a ban.
China’s General Administration of Customs said China imported 6.12 million metric tonnes of nickel in January. But this activity dropped to just 3.1 million metric tonnes in February. The year-over-year growth of China’s nickel imports from Indonesia in February was -1.38%, compared to 53.51% in January. February’s year-over-year drop would have been more extreme if China didn’t celebrate its Lunar New Year festivities in February 2013.
High stockpile: A short-term negative
A survey by Bloomberg pointed out that traders and factories in China held about 29 million metric tonnes of nickel stockpiled at ports. According to traders’ and analysts’ consensus in January, when the ban first came out, this level of inventory was able to sustain production of nickel pig iron for five months. High stockpiles meant dry bulk shipping companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) were negatively affected.
Still, China will have to find alternative sources of nickel ore as its inventory falls. Given that about two and a half months have already passed since the ban was implemented, China is going to experience a tightened supply of nickel ore soon—assuming the five months also include safety stock.
Can the Philippines replace Indonesia?
Among all of China’s choices, the Philippines seems to be the best alternative at this point, since the major nickel producer is much closer to China than countries like Australia, Russia, and Canada. The Phillippines is also a key supplier of low-grade nickel ore to China, extracted from lateritic nickel ore deposits. However, its ore typically has lower nickel and higher iron content compared to ore in Indonesia, so switching feeds isn’t a simple or economic process.
Whether production will necessarily increase to meet higher inquiries is also another point to consider. As Dennis Zomara, senior vice president of Nickel Asia (a Philippine nickel ore producer), told Reuters in February, “We already have too much demand as it is and we’re not taking new orders… I think we’ll see the effect in price, not in volume.” Besides, Indonesia produced about 72,000 metric tonnes a month of nickel ore and concentrates in 2013, while the Philippines only produces 27,700 metric tonnes a month.
Indonesia’s export ban hurts dry bulk shippers in the short term
The latest movement in the Baltic Exchange Indices
Since January 2014, the year-over-year growth of the Baltic Dry Index—the benchmark that reflects the overall shipping rate for transporting dry bulks such as iron ore, coal, and grain across the ocean—has fallen quite a bit. Still, it’s a long-term positive sign that the yearly growth is still above 50%.
Supramax and Handymax vessels appear to be underperforming the overall dry bulk index, likely because increased iron ore production and exports are supporting Capesize rates. Panamax rates are also underperforming, as lower Indonesian exports contribute negatively to demand for Panamax vessels, and the particular class of vessel is currently experiencing above-industry-average capacity growth.
Indonesia’s export ban has a negative effect on dry bulk shipping rates
Indonesia’s ban on unprocessed nickel and bauxite can drive down shipping rates in the short run—especially for smaller dry bulk vessels that are more often used to transport minerals. Due to this export ban, China, the largest buyer of Indonesia’s raw ore, will need to import substitute supply from more distant sources like Canada and Russia and pay more for shipping those goods, which could be positive for the shipping industry later on.
The short-term outlook for dry bulk shippers isn’t so bright
Although China has to switch imports sources, the market outlook for dry bulk shipping isn’t so bright. Traders and analysts believe Indonesia’s export ban will continue to drive up nickel price before nickel production in other exporting nations is able to catch up and fill the gap Indonesia has left. This is a pretty big deal, since China imports about 3.5 million metric tonnes of nickel ore and concentrates a month from Indonesia. Globally, dry bulk trade per month is equivalent to ~320 million metric tonnes per month. Given the inelastic supply nature of the shipping industry, even a 1.0% difference can have a large impact on the Guggenheim Shipping ETF (SEA) and dry bulk shippers like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Holdings Inc. (NM).
Why dry bulk shippers should recover from Indonesia’s export ban
Is this ban going to last?
Analysts reported that about 500,000 mining workers are being laid off as mining companies halt operations due to Indonesia’s export restriction. Smaller mining companies that lack the capacity and resources to sustain production are in substantial trouble. If the new government revises this export ban, which some analysts expect in the second half of this year, shipments will likely return to normal. But that doesn’t really matter.
Alternative sources
China has to find an alternative source of nickel before the safety stock runs short, even though no other country can replace Indonesia perfectly. Right now, China primarily imports nickel ore from Indonesia, the Philippines, New Caledonia, Australia, and Russia. Other than the Philippines, all the other nations are farther away from China than Indonesia. If China is going to increase imports from New Caledonia, Australia, and Russia, dry bulk shippers should benefit from higher shipping rates, since the voyages will take longer.
China’s speeding up its refineries
China’s total nickel ore imports are increasing rapidly, so it’s urgent for the country to figure out a way to deal with Indonesia’s export ban. China also has the option to invest in smelters and plants in Indonesia, so that it can export processed nickel pig ore directly to China. Building a processing facility is costly, so Indonesia has to seek foreign investment from China and cooperate with Chinese companies—which is also what the Indonesian government wants to see: more investment and higher value-added exports.
In January, Reuters reported that several Chinese firms are speeding up their plans to build nickel refineries in Indonesia. So investors can expect higher nickel pig iron exports out of Indonesia, which would eventually lift dry bulk shippers from the current short-term negative. This situation would be positive for the Guggenheim Shipping ETF (SEA) and dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), and Navios Maritime Partners Inc. (NMM).
To find out more about important trends affecting the marine shipping industry, see the Market Realist series Have dry bulk shippers like Navios gotten ahead of themselves?