Indonesia ore ban to hit metals markets It is a law that few people in the commodities industry expected to be enacted. But it now looks likely that Indonesia, one of the world's most important sources of minerals used to produce industrial metals, will implement an export ban on unprocessed mineral ore. Flows of nickel ore and bauxite are expected to stop, though the government in Jakarta is considering a range of exemptions, particularly for copper producers. Nickel ore exports Supply and demand forecasts The move, expected to be announced on Sunday, will be most keenly felt in China, which relies heavily on Indonesian ore to produce nickel pig iron, a key ingredient in stainless steel. More than a fifth of China's aluminium is produced from bauxite imports from Indonesia. "This is the biggest supply risk facing base metals in a long time, particularly nickel and aluminium," says Gayle Berry, base metals analyst at Barclays. The market has been very complacent, thinking the Indonesians would backtrack. The ban is part of a mining law that was approved in Indonesia in 2009 to encourage industrial development and increase the value of its raw material exports. However, Indonesia, the world's biggest supplier of nickel ore, seaborne thermal coal and refined tin, has a history of dropping controversial policies and last-minute compromises. That is one reason why prices have yet to react to the supply threat, say traders. Nickel, for example, fell nearly 20 per cent last year, and traded as low as $13,450 a tonne on Wednesday. Significant surpluses of nickel and aluminium have also built up at London Metal Exchange and non-LME warehouses since the financial crisis. In addition, China has built up large reserves of nickel ore and bauxite from Indonesia that could last for up to a year. It has also stockpiled nickel pig iron. But if the ban is not relaxed (and remains in place after April's parliamentary and July's presidential elections), prices could rise later this year and into 2015 as industrial users eat into the metal stockpiles, say analysts. "You are going to see a big drop in bauxite and nickel exports from Indonesia," says Colin Hamilton, the head of commodities research at Macquarie. If prolonged, the ban will be a very big issue. It will affect markets for the next two years. This is particularly true for nickel. The high-grade nickel laterites required by Chinese pig iron factories are found in tropical regions with high rainfall - especially Indonesia and, to a lesser extent, the Philippines. The effect on the aluminium market may be less significant, as China, the world's largest aluminium producer, can source bauxite from other countries such as Australia. "If the ban sticks this is an absolute game changer for nickel," says one senior industry figure. Unlike bauxite, there aren't nickel resources everywhere that can be used to make nickel pig iron. And there are reasons for thinking the ban will remain in force beyond this year's elections. Nickel ore and bauxite only accounted for $2.1bn of Indonesia's total exports in 2012. And with limited nickel processing facilities in Indonesia at present, the new law will encourage Chinese and other investors to build new refineries. Analysts estimate it would cost between $7bn and $12bn to build 150,000 to 200,000 tonnes of contained nickel processing capacity in Indonesia. To put that figure in perspective, Indonesia currently exports the equivalent of about 400,000 tonnes of contained nickel a year. Refined ore would also fetch a higher price on global markets. "The economics look compelling," says another industry figure.