In late March, I revealed to readers why the stars were aligned for a nickel bull market this year.
The reasons centered around Indonesia’s export ban on raw ores, including nickel. (Indonesia is the world’s largest producer of mined nickel.)
And, indeed, nickel roared ahead to its highest level since February 2012 – up about 45% in 2014, before a recent pullback in price.
But nickel isn’t the only ore that Indonesia’s export ban affects. The country also banned exports of bauxite ore.
Bauxite ore is first refined into alumina, which is then refined further into aluminum. It takes four to seven tons of bauxite to make one ton of aluminum.
Yet, despite the Indonesian export ban, aluminum prices have been stagnant so far in 2014. That may not last much longer, though…
Indonesia, China and Aluminum
You see, in the period from 2007 to 2013, Indonesia accounted for approximately 60% of global exports of bauxite.
Now that huge amount of bauxite has been removed from the market.
That’s of particular concern to China, which is the world’s biggest consumer of aluminum. China also produces half the global output of aluminum.
The thing is, in 2013, China obtained about 68% of the bauxite it needed for aluminum refining from Indonesia. That totaled approximately 48.7 million metric tons (mmt).
So, when China was aware of Indonesia’s plans to ban bauxite exports, it stockpiled months’ worth of the ore.
But now that stockpile is dwindling – and may be completely exhausted within a year.
That bodes well for both aluminum prices and alternative suppliers of bauxite to China. Especially because Chinese demand for bauxite is forecast to climb another 30% by 2018.
Indeed, the ban has already boosted prices on bauxite imports into China. Prices are at their highest level since October 2008.
So which companies will benefit the most?
The Future for Aluminum and Investments
Estimates show that Chinese imports of Australian bauxite will jump by more than a third – to 16.8 mmt in the year ended June 30.
Of course, BHP and RIO aren’t pure-plays on bauxite or aluminum.
To get more of a direct play on the coming rise in aluminum prices (perhaps 30% or so) in the months ahead, investors may want to consider two exchange-traded notes from iPath.
The ETNs are the iPath Dow Jones-UBS Aluminum SubIndex Total Return ETN (JJU) and the iPath Pure Beta Aluminum ETN (FOIL). Both ETNs, from Barclays Bank, are designed to track the performance of aluminum futures traded on the London Metals Exchange.
These ETNs will do well if aluminum prices rise. Just keep in mind that both are very thinly traded.
And “the chase” continues,