Bauxite: the impact of Malaysia lifting its moratorium on mining

Malaysia has announced it will lift a moratorium prohibiting bauxite mining when it expires on March 31 st . A ban had been in place since early 2016 due to the visible contamination of water sources from unregulated mining and run off from stockpiles. In 2015, Malaysia was the principal supplier of ore to China , replacing Indonesia that had put a ban on unprocessed ore exports in 2014. However, following the ban put in place in 2016, Guinea has emerged as the principal supplier of bauxite to China. Guinea has increased production from just 18 M t in 2015 to 60 Mt in 2018 , with China investing heavily (i.e. a $20 billion resource for infrastructure deal signed in 2018 gave three Chinese companies bauxite mining concessions) to become the dominant player in the Guinean bauxite market. Robust demand and falling domestic production in China last year (clampdown on illegal mining in the top producing province, Shanxi) led to Australian bauxite prices spiking to their highest in three years in January 2019 . Chinese refineries also cut production last year due to limited bauxite supply , (i.e. China’s Xinfa group announced it had cut operating capacity by 50% at its Shanxi Jiaokou alumina refinery in November, and lowered production by 500 kt at an alumina plant in the Guangxi region in February ) . Bauxite accounts for ~25% of refiners costs when producing alumina, with energy and caustic soda/lime other key cost components. With alumina accounting for ~40% of aluminium smelters costs , bauxite represents ~10% of the total cost of producing aluminium. T h e supply pressure being faced by Chinese refiners is expected to be short lived as further growth in Guinean exports and a rebound in Chinese domestic production in 2019 leaves the market adequately supplied. This comes despite Chin ese bauxite demand continuing to grow in the coming years. We expect this will mean Mal aysian export growth is limited. E asily accessible, high quality ore reserves are limited in Malaysia, while cash costs of mines are higher than their equivalents in Indonesia and Guinea. The former is seeing a modest rebound in ore exports, although the upcoming elections in April will determine export regulations, and therefore Indonesian supply, going forward. Guinea’s bauxite deposits are abundant, easily scalable and can be developed with little capital investment . This, alongside more relaxed regulation on mining in Indonesia and Malaysia, should mean that the bauxite market exhibits a surplus in the com ing years. Therefore, we expect bauxite prices to trend lower, supporting refiner’s margins .