Global Metals Weekly：Indonesia’s export ban： impact on copper, nickel, aluminium

>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 26 to 27. Link to Definitions on page 25. 11350956 Global Metals Weekly Indonesia’s export ban: impact on copper, nickel, aluminium Commodities | Global 23 January 2014 Global Commodity Research MLPF&S Michael Widmer +44 20 7996 0694 Metals Strategist MLI (UK) michael.widmer@baml.com Daisy Suryo >> +65 6678 0410 Research Analyst Merrill Lynch (Singapore) daisy.suryo@baml.com Stephen Gorenstein >> +61 3 9659 2297 Research Analyst Merrill Lynch (Australia) stephen.gorenstein@baml.com Anthony Kuo >> +61 3 9659 2112 Research Analyst Merrill Lynch (Australia) anthony.kuo@baml.com Oscar Cabrera >> +1 416 369 2775 Research Analyst Merrill Lynch (Canada) oscar.cabrera@baml.com Francisco Blanch +1 646 855 6212 Commodity & Deriv Strategist MLPF&S francisco.blanch@baml.com Chart 1: Indonesian nickel ores account for more than 10% of global nickel supply Source: Woodmac, CRU, INSG, company reports, Metals Economics, Metal Bulletin, Bloomberg, BofA Merrill Lynch Global Commodity Research  Indonesia adjusts export regulations Indonesia has been a major mining nation for decades. However, the government has shown unease with the structure of the country’s mining industry for a while. As a result, Indonesia’s President Susilo Bambang Yudhoyono signed legislation PP No 1/2014 on 11 January, which has far-reaching implications for the country’s producers. Most notably, exports of bauxite (the mined raw material used by aluminium smelters) and unprocessed nickel ores are banned. Other materials, like copper concentrates, can be exported for three years, after which only refined metal can be shipped. FCX to deliver less concentrate longer-term While Indonesia produces only 3% of global copper supply, operations are very concentrated, with Freeport’s Grasberg mine one of the largest operations globally. FCX processes around 35% of Grasberg concentrates at the Gresik complex, while the rest is exported. We believe the company should be able to ship concentrates abroad in the coming three years as long as it invests in smelting and refining capacities and ultimately treats mine output domestically. Negotiations with the government are ongoing and FCX indicated that it would defer some production until a settlement has been reached. Looking further out, global refined copper market balances should not be affected, although reduced concentrate shipments are set to keep the pressure on custom smelters. China’s nickel producers face sourcing difficulties The nickel market has been severely oversupplied in recent years, partially because China has become more self-sufficient in processed nickel. Given China’s mediocre nickel mine endowment, this was possible because the nickel pig iron producers could import nickel ores from Indonesia, whose mine supply now feeds more than 10% of total global refined production. Ore inventories give NPI producers some breathing space, but given the ban on nickel ore exports, we believe China’s NPI output growth is set to gradually tail off. This should help reduce global market surpluses. Hence, we maintain our 4Q14 price target at $17,000/t ($7.71/lb). Cost pressure for China’s aluminium smelters from alumina The rapid growth of China’s aluminium output was possible in part because the country’s alumina refineries could import bauxite from Indonesia. With the export ban from Indonesia now in place, we see various options for China’s aluminium industry to source raw materials, all of which however push up production costs. China NPI - Indonesia 14% China NPI - non Indonesia 9% China - non NPI 12% World ex-China 65% barbarayy_tong@citickawahbank.com Barbara Tong 01/24/14 03:01:22 AM CITIC Bank International 2 Global Metals Weekly 23 January 2014 Contents Proposed Indonesian regulations 4 Copper 4 Nickel 6 Bauxite, alumina and aluminium 10 Appendix 14 barbarayy_tong@citickawahbank.com Barbara Tong 01/24/14 03:01:22 AM CITIC Bank International Global Metals Weekly 23 January 2014 3 Table 1:Trading views on mined commodities General synopsis Global growth to accelerate next year, although this is partially driven by DM, where economic activity is less commodity intensive. Those raw materials with supply constraints will likely outpeform. Headwinds to gold to persist. Commodity Period A