India’s move to double the export tax on aluminum-rich bauxite to 20% is likely to heat up prices for Chinese buyers, who have been scouring for the mineral ever since Indonesia imposed a ban on shipments earlier this year.

India’s rich mining resources have been drawing interest from overseas with China last year buying more than 90% of the country’s exports of bauxite, used as raw material to make aluminum. But India’s proposal in last week’s budget plan to raise export tax to help local aluminum producers now risks stoking global prices higher and adding to headaches for China struggling to find supplies.

“Higher duties may ensure better domestic availability; (but) could push bauxite prices to rise faster as it moves India up the cost curve for landed volumes into China,” said analysts in a Citigroup research report.

In May this year, India jumped to become the second-largest exporter of bauxite by sea to China, after Australia, with a share of 25%. China is turning to India, Australia and other resource-rich countries after Indonesia banned a range of raw commodity exports because it wants to move up the value chain and process the minerals too.

India’s budget needs to be approved by parliament, but that is expected within a month and expected to be a formality.

It is difficult to immediately substitute Indian bauxite volumes, particularly as Indonesia’s export ban has left few alternate sources,  said Rusal, the world’s biggest aluminum producer, in a statement to The Wall Street Journal.

Indian bauxite prices are currently stable in the range of $32-$37 per ton, but analysts say prices are likely to rise over a period of time as China’s built up stocks of the mineral dwindle.

“Bauxite supplies will become an increasing issue in the fourth quarter of this year and more so next year,” said Ivan Szpakowski, Citigroup’s Shanghai-based Asia analyst. “The reality is that there is not enough bauxite to replace Indonesian bauxite in the next 12 months.”

He said China will be forced to rely on Indian imports in coming months, which will lead to a rise in market prices of the mineral.

China has also been sourcing some bauxite from Brazil and the Dominican Republic, which cost about double the price of Indian shipments because of higher freight rates. Some volumes are also being shipped from Africa, which are also more expensive.

“There could be a reduction in the demand for Indian bauxite immediately as a result of the increase in export duty,” said S Sabarinath, associate director for metals and minerals at Frost & Sullivan consultancy. India miners “would be forced to sell in the domestic market.”

Over the longer term, Indian supplies of bauxite may fall as aluminum producers in the country look to expand and use more raw material.

“Local players are short of bauxite for expanding domestic aluminum production. This decision will help them to produce more aluminum at less cost,” said S Sabarinath, associate director for metals and minerals at Frost & Sullivan consultancy.

India’s Hindalco and London-listed Vedanta Resources has been looking to expand aluminum production capacity in the country, which has billions of tons of the raw material. However, tapping these domestic sources has not been easy because of concerns over environment. Both the companies were not available for comments.

Source:- blogs.wsj.com