Here's why aluminium could be the new nickel

Suzie Neuwirth
(Source: Getty)

After an Indonesian export ban caused the price of nickel to soar over 40 per cent this year due to a squeeze on supply, the market is poised for aluminium prices to follow suit.

With more than 10 per cent of the world’s bauxite (aluminium ore) coming from Indonesia before the ban – equivalent to Saudi Arabia’s share of the oil market – it would, on the face of it, seem likely.

“The rise in bauxite prices is quietly underway, with Chinese bauxite import prices rising from $52 (£31.1)/t to $60/t, and non-Australian import prices rising to $68/t, from $51/t,” said Goldman Sachs research today.

But the analysts predict a less earth-shattering price rise than we’ve seen with nickel. Indonesia produces a smaller portion of the world’s bauxite supply than the world’s nickel supply, lessening the effect of the ban. Bauxite is a smaller proportion of aluminium output costs than nickel ore is to nickel production costs.

China got the lion’s share of its aluminium from Indonesia last year, but forward-thinking producers ramped up their imports ahead of the ban, leading to 6-12 month stockpiles. Other countries including Australia, India and Guinea could supply the metal over the medium term.

“While these factors mean that the magnitude of the increase in nickel prices is unlikely to occur in aluminium, rising bauxite prices will, in our view, eventually place pressure on Chinese aluminium producers to cut production, supporting our medium-term bullish aluminium view,” said Goldman Sachs.

“Indeed, higher bauxite prices will be required to incentivise both alumina capacity investment in Indonesia (currently severely lacking) and non-Indonesian bauxite supply to ramp up to fill the 10 per cent supply gap over time.”

(Source: Metal Bulletin, LME, Goldman Sachs Investment Research)