Thu, 17 Oct 16:06:00 GMT
* Strong bull run forecast if Indonesia ban fully implemented
* Ban could force closure of China's nickel pig iron plants
* Production troubles set to corrode surplus further
By Freya Berry
LONDON, Oct 17 (Reuters) - A potential ban on nickel ore exports by Indonesia next year and production cutbacks could lift the price of this year's worst-performing base metal by more than 20 percent off multi-year lows, analysts said.
Indonesia, the world's top exporter of nickel ore, has said it plans to bring in a ban on unprocessed ore exports from Jan. 1, 2014. Its ore is currently shipped to China to produce nickel pig iron, a cheap substitute for higher grade nickel in stainless steel.
It is not certain that the ban will go ahead unchanged, but if it does analysts said it would be a game-changer for prices.
Benchmark nickel on the London Metal Exchange has fallen by around a fifth since January to four-year lows, weighed down by over-supply, and was trading at $13,963 a tonne at 1529 GMT on Thursday.
"It's such an important swing factor for the market that you could see a decent rally in the nickel market if a ban is strictly enforced – at least 20 or 30 percent," said Daniel Smith, head of metals research at Standard Chartered.
"It goes without saying that it's pretty crucial for the Chinese nickel pig iron sector."
Ore exports from Indonesia account for 60 percent of China's ore imports, according to consultants WoodMackenzie. The law will require mineral ores to be processed domestically before export to encourage foreign investment and boost profits.
Analysts believe that Indonesia does not have the capacity to process the enormous amounts of ore it produces, and so the ban would strangle nickel ore exports to China, the world's biggest importer.
"If the ban really happens, I see no alternative but large swathes of the nickel pig iron industry (in China) having to close," said Stephen Briggs, strategist at BNP Paribas.
If the plans are implemented in full next year, the supply restrictions will eat into the present surplus, estimated by Barclays at 78,000 tonnes.
It is not certain that Indonesia will go ahead with the ban: the Energy and Minerals Resources Ministry has initiated talks with lawmakers to revise the law.
But in the meantime, China has ramped up its nickel ore buying, with imports jumping 10 percent year-on-year in August 2013, data from HSBC showed. However, analysts warned that any stockpile cushion against the law would eventually run out.
"It is very problematic for the Chinese nickel pig iron industry to find alternative sources of ore," Briggs said, adding that although China could turn to the Philippines, another major producer, its ore was of a lower grade.
There have been production snags in the industry too.
Anglo American has delayed output increases at its 40,000 tonne Barro Alto mine in Brazil and Glencore Xstrata has shuttered its 16,000 tonne Falcondo site in the Dominican Republic, BofA Merrill Lynch Global Research said in a report.
Mirabela Nickel has problems at its 24,000 tonne Santa Rita operation in Brazil, while Finland's Talvivaara faces difficulties in ramping up its 40,000 tonne mine. Norilsk Nickel has also signalled it will focus on its Russian assets at the expense of output elsewhere, the report said.
"In short, we are comfortable with our forecast that nickel could rise to $17,000/t ($7.71/lb) by 4Q14, approximately 22 percent above prices currently implied by the forward curve," it said, also citing Indonesia's possible ban.
(Editing by Susan Thomas and Anthony Barker)