National resource conservation negatively impacts importing countries
Resource nationalism is asserting itself mostly subtly but on occasions bluntly across the globe, writes Kunal Bose. Even the countries swearing by free trade principles are too found to be practising resource conservation in ways hurtful for importing nations. For example, China and some other Asian countries did not take it kindly when India, in spite of its large reserves of iron ore estimated at 30bn tonnes, put a spanner in the works as regards exports by charging a prohibitive 30% export duty and simultaneously slapping highly discriminatory railway freight on ore marked for overseas despatch. Another highly resource-rich Asian country, Indonesia, asserted resource nationalism to its extreme on 12 January when it put a ban on exports of bauxite, nickel ore and copper concentrate. The move by the Indonesian government was not unexpected since it went on serving notice over the past few years that exporters would have reasons to regret if they did not invest in value addition chain like alumina refineries or smelters to process copper concentrate.
The export ban has, however, been challenged in Indonesian Constitutional Court, whose verdict is keenly awaited. “Anything that happens to Indonesian bauxite exports will have a strategic fallout for the world aluminium industry. This is because the mineral sourced from Indonesia was used prior to the ban for 10% to 12% of world aluminium production,” says India’s National Aluminium Company (NALCO) chairman Ansuman Das. He is keeping a close eye on Indonesia for this country is one of the six shortlisted destinations where NALCO is planning to build a 500,000-tonne aluminium smelter backed by a 1,200MW captive power complex. “Wherever the smelter is finally built we will bring the feedstock alumina from our refinery in India,” says Das.
For all commodities, including bauxite, that China is largely import dependent, it has fine-tuned a policy of building a strategic reserve if a supply crisis is anticipated. The January ban being on the cards for a long time, China made smart moves to build an estimated 12-month stockpile of required bauxite imports from Indonesia and other countries. But since there will be drawing down of the imported stockpile to run refineries at their present level, the imported inventory will continue to shrink. China is seen making attempts to get extra bauxite from non-Indonesian sources, including Australia and India. In the building of inventory, China last year brought as much as 42mt (million tonnes) of bauxite from Indonesia alone supplemented by imports from Australia and other countries.
Indonesia turning off exports could not but leave an impact on bauxite prices. After all the country’s share of global bauxite market is like Saudi Arabia’s presence in the oil market. Goldman Sachs says in a report that the “rise in bauxite prices is quietly under way, with Chinese bauxite import prices rising from $52 to $60 a tonne and non-Australian import prices rising to $68 a tonne from $51.” It, however, does not think that bauxite will see nickel’s 40% price rally in the post export ban period. Rising bauxite prices, in Goldman Sachs’ view, will eventually place pressure on Chinese aluminium producers to “cut production, supporting our medium-term bullish aluminium view.” Of the world 2013 aluminium production of 50.196mt, China alone had a share of 24.498mt. Much of the aluminium smelted by China is for domestic use. Its aluminium exports amounted to 1.22mt. The world’s second largest economy decided early that, though its own bauxite resource is of poor quality and also not sufficiently large, it must seek self-sufficiency in alumina refinery capacity by importing bauxite in increasingly large quantities. This resulted in China raising alumina production by 13.2% to 41.228mt in 2012 and then by 14.7% to 47.284mt last year. According to CRUMonitor, Chinese alumina production in the first two quarters of 2014 was 24.72mt. Alumina is globally traded at handsome FOB (free on board) rates of $325 to $330 a tonne, thanks to rises in bauxite prices in upstream and aluminium prices in downstream.
According to Yin Zhonglin, director of alumina division of Chalco Zhenghou Research Institute, the Indonesian ban is giving a push to Chinese companies to find new sources of bauxite supply. He informs that as many as 13 Chinese companies have the mandate to “secure bauxite mining projects abroad.” Australia’s proximity to China gives it a distinct logistical advantage over most other alternative supply sources to meet the major part of growing bauxite requirements of the world’s by far the biggest producer of alumina and aluminium. Besides Australia, Guinea and Fiji both with major bauxite resources are also on Chinese radar. Research and consultancy agency CRU says Chinese bauxite imports will see a two-and-a-half-fold increase from 38mt in 2012 to 95mt by 2022. CRU has also come to believe that the global bauxite market is in the midst of a structural change. The world will see the emergence of a number of new junior miners in the market even while Australia will continue to dominate bauxite trade. The country will also emerge as the largest exporter of the mineral to China. An analogy may here be drawn with China’s approach to acquiring iron ore assets abroad since like in bauxite, the country doesn’t have iron ore resource of good quality. Beijing, therefore, has set itself a target of owning deposits in Australia and Africa mainly to ensure that at least 50% of Chinese iron ore imports in the medium term originate from its owned assets. China’s iron ore imports in 2013 rose 10% year-on-year to 820mt.
Unlike China, both in resource size and mineral quality in terms of alumina content and low traces of silica, India ranks in the top tier of bauxite-owning countries. At 3.48bn tonnes, Indian bauxite resource, as has been estimated by Indian Bureau of Mines in 2010, is the fifth-largest in the world. Even then, since the 1980s when NALCO opened the mine with deposits of well over 300mt at Panchpatmali hills of Koraput district in Orissa, the country has not seen the opening of any new bauxite mines of significance. This is because of inordinately long time taken by government agencies to sanction lease rights to deposits. Hosts of forest and environment clearances in which both the central and state governments are involved do not come easily either.
Vedanta Aluminium stands as an example with ownership of a 1mt refinery in Orissa with plans for expansion to 5.5mt being denied access to nearly 100mt bauxite deposit at Niyamgiri hills because of sustained violent protests by local tribals backed by NGOs. Nor has the Orissa government taken steps, as it is obliged under an agreement with Vedanta, to meet bauxite requirements of the refinery from its owned mines. In fact, Vedanta’s discomfiture with running the Orissa refinery with bauxite being procured from multiple sources has become a global cause celebre. Hindalco, which owns the world’s largest value-added aluminium products manufacturer Novelis, has in the last few years expanded primary aluminium-making capacity in India from 600,000 tonnes to 1.3mt. The company is, however, facing the challenge of opening new bauxite mines and coal mines in the already allotted blocks.
The reforms oriented newly installed government in Delhi appears committed to a transparent mining policy expediting lease approvals and auction of deposits. Mines minister Narendra Singh Tomar has struck the right note by saying he will frame a new mining policy in sync with recommendations and expectations of the country’s minerals rich states like Orissa, Jharkhand, Chattisgarh and Goa. Tomar is trying to ensure that mining activities, which came under cloud during corruption infested ten years of the last government, pick up steam quickly to ease the functioning of India’s rapidly expanding steel and aluminium industries. He no doubt is committed to investing transparency in allocations of deposits. But the policy needs to be framed in a way as to make mining strictly environment friendly. Rehabilitation of people to be displaced by opening of new mines must get due weightage in the policy. Das makes the point that since energy accounts for anything between 30% and 35% of aluminium cost of production, aluminium makers will ill afford participation in coal block auctions where acquisition cost becomes prohibitively high. “For India to get its rightful place in the world aluminium industry in the context of its ownership of rich bauxite and non-coking coal deposits, we aluminium producers should get coal resource allocation commensurate with our long-term fuel requirements without going through the auction process,” says Das. India’s other two aluminium producers Hindalco and Vedanta agree with Das. Making a reference to Canada, Das says the country remains committed to using its “abundant hydroelectricity to remain a key global supplier of aluminium and value added products. Similarly, India should be making best use of its bauxite and coal resources.”
Should Indian aluminium producers also look beyond the country’s shores and bid for bauxite and coal resources abroad? Das says, “for makers of metals, aluminium or otherwise, raw materials security is of prime importance. Our companies should be encouraged to acquire bauxite assets abroad. But here I shall put a caveat. We shall prospect for acquisition opportunities in countries with which India has a good relationship and where governments are favourably disposed to foreign investment. Long-term security of assets is always an important determinant of any acquisition. Low-cost energy is the reason why NALCO is in search of a foreign location for building a smelter.” While venturing abroad, investment risk could be shared if more than one party become partners in a joint venture. Boddington Bauxite Mine in Western Australia and Mineracao Rio do Norte in Brazil are two leading examples of joint ownership of bauxite assets. BHP Billiton owns 86% of Boddington and 14.8% of Mineracao.
Uncertainties surrounding Indonesian bauxite exports will remain till the Constitutional Court gives its verdict. Falling in line with requirements of value addition, five greenfield alumina refineries were launched in Indonesia in recent times. But the work on all these projects has slowed down as the promoters think it will be wise to wait for the outcome of legal challenge of export ban order. In case exports resume, the rationale for investments in alumina plants will become weak. Well Harvest Winning Alumina, a partnership between the local Harita group and China’s Hongqiao, was originally scheduled to start operation of its refinery at West Kalimantan in mid-2015. This has now been pushed back to early 2016. But there could be further postponements in commissioning the refinery. The 2mt Bintan Alumina refinery is unlikely to go on stream in early 2017 as thought earlier. The state-owned PT Aneka Tambang is the only refinery working, which started production in April.
In the meantime, Guinea’s parliament has approved amendments to a deal with Emi Global Aluminium, formed by integrating businesses of Dubai Aluminium and Emirates Aluminium, clearing the path for start of work on a bauxite mine opening in 2017 and construction of a 2mt refinery in 2018. EGA is to become the world’s fifth-largest aluminium producer this year as the Guinean project will secure feedstock for its smelters in UAE. The developed world having left behind the scars of 2008–09 recession and emerging economies focusing on urbanization and infrastructure development, the global aluminium demand will continue to grow at 5% or more. The world aluminium production is forecast to grow 50% to 75mt by 2025. Supporting that level of aluminium production will call for massive investments in opening new bauxite mines and expanding the ones in operation and building of many large greenfield alumina refineries.