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Canadian nickel producers hope to benefit from Indonesia’s export ban

A worker holds a pipe at Mobi Jaya Persada’s nickel mining area, Dampala village in Marowali, central Sulawesi province Jan. 12, 2014. Hundreds of small Indonesian mines are preparing for the worst after the government imposed a controversial mineral export ban on Sunday that could force them to close down.

YUSUF AHMAD/REUTERS

Indonesia's ban on raw mineral exports has the potential to rejuvenate a nickel industry that is suffering from a plunge in metal prices.

The ban, which started on Sunday, has pushed nickel prices up on fears that there will be a shortage of the silvery white metal used to make stainless steel.

That would help Canadian producers Sherritt International Corp., Lundin Mining Corp. and First Quantum Minerals Ltd.

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Toronto-based Sherritt, which runs the Moa nickel mine in Cuba and is developing a giant nickel mine in Madagascar, could see benefits immediately.

"Any improvement in the nickel prices will go straight to our revenue," said Sherritt's chief executive officer David Pathe.

Shares of Sherritt and other producers gained about 5 per cent on Thursday. Shares of tiny Canadian nickel companies First Nickel Inc. and Royal Nickel Corp. also made gains.

Although nickel is trading at two-month highs of $6.50 (U.S.) a pound, the metal is down 70 per cent from its record high of $24 reached in 2007 when supplies were scarce.

"This is wildly bullish for the industry," said Mark Selby, senior vice-president of Royal Nickel, which is working on a project in Quebec that could one day rival the massive nickel mines in Sudbury.

Indonesia is the world's largest producer of nickel and is responsible for about 20 per cent of global supply.

Although there is currently a glut of nickel on the market, the world could start running out of the metal in 2015 if the Southeast Asian country keeps the ban in place. That could send prices back into the double digits.

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Indonesia's raw mineral export ban stems from a 2009 law that required the country to process its ore domestically by 2014.

But Indonesia only has a handful of smelters and does not have the infrastructure in place to refine all of its ore.

Like Indonesia, Canada is a resource-rich country that struggles with how to boost the value of its raw materials.

About a quarter of Canada's merchandise exports is unrefined oil, gas and minerals. That represents $122-billion (Canadian) worth of exports.

"That's a lot of raw stuff we are sending somewhere else," said Peter Hall, chief economist with Export Development Canada, a Crown corporation that provides insurance and financial services to Canadian exporters.

If Canada refined more of its raw materials, it would not only boost the value of the resource but would create more jobs in the country.

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"We would have the additional jobs around refining and of course the value added inside the economy would be augmented that much more," Mr. Hall said.

Analysts believe the market has been slow to react to the Indonesian ban for a few reasons.

China, the largest consumer of nickel, has hoarded about a year's worth of ore in anticipation of the ban.

Sherritt's Ambatovy mine in Madagascar and half a dozen other nickel mines are ramping up production, which has flooded the market and depressed prices.

Investors are skeptical Indonesia will uphold the ban until enough refineries are built.

"The market is still expecting that there will be exceptions to the rule," said Jessica Fung, commodity strategist with BMO Nesbitt Burns. "We don't think it will be more than a few months before we see some ore exports come out again."

The Indonesian government has already exempted copper, iron ore and zinc from the ban.

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About the Author
Economics Reporter

Rachelle Younglai is The Globe and Mail's economics reporter. More

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