(Corrects paragraph 5 to say Indonesia may relax ban)
* Indonesia reversal sees China firms to step up smelter plans
* Chinese likely sell nickel-pig-iron from Indonesia to Asia
* Supply to cut costs of stainless steel mills in Asia
By Polly Yam
HONG KONG, Sept 11 (Reuters) - Chinese firms operating nickel mines in Indonesia are likely to step up plans to build nickel-pig-iron plants in the Southeast Asian country in order to continue shipping ores back home, which would help support higher production in China next year.
The move could mean Chinese firms' supply of nickel-pig-iron, a low-grade ferro-nickel used in stainless steel production, would rise in Asia in 2 to 3 years time, helping regional mills such as POSCO and Nippon Steel & Sumitomo Metal to cut costs, industry sources said.
China is the dominant producer of nickel-pig-iron in the world and the output accounts for about a quarter of the global nickel production. But the production relies on imports of raw material nickel laterite ores, with Indonesia and the Philippines providing most ores.
Indonesia had planned to ban the export of ores from 2014 to push miners to build smelters at home to benefit the local economy.
But in a policy reversal, it may now relax the ban in order to help support the rupiah currency and miners with smelters under construction will be allowed to continue to export ores.
The policy twist is prompting Chinese firms to step up smelter projects in Indonesia.
"To make it quick, we are thinking about relocating a small blast furnace to Indonesia," said a source at a nickel-pig-iron producer in China, which owns a few nickel mines in Indonesia.
Other Chinese firms operating nickel mines in Indonesia were also considering relocating idle furnaces or build new small blast furnaces as the costs were low, the source added.
Twelve to thirteen Chinese firms operate nickel mines in Indonesia currently and half plan to build plants to produce nickel-pig-iron or standard ferro-nickel, said Xu Aidong, chief nickel analyst at state-backed research firm Beijing Antaike Information Development Co Ltd.
The Chinese firms were likely to sell nickel-pig-iron produced in Indonesia into Asia, rather than ship back to China, because demand from other Asian countries was strong, while China was facing an oversupply problem, Xu said.
"Why China's stainless steel mills are competitive, it is all about nickel-pig-iron. More supply to other Asian mills should strengthen their competitiveness in the future," she said, referring to the cost advantage of using nickel-pig-iron.
Stainless steel mills in Japan, South Korea and Taiwan want to import nickel-pig-iron from China as a cheaper alternative to replace refined nickel. The cost advantage is that it contains a high iron content but the iron is not priced.
But China's 20 percent tax has restricted exports, said Xu.
To reflect demand of nickel-pig-iron, stainless steel mills in China paid about 1,000 yuan ($160) per 1 percent of metal content for nickel-pig-iron containing 10-15 percent of metal this week. The price was equivalent to 100,000 yuan a tonne of nickel, higher than 97,700 yuan NI-1-CCNMM for refined nickel.
Antaike has forecast China's nickel-pig-iron production at about 400,000 tonnes of nickel in 2013 and the output could rise next year as thousands of tonnes of new, modern capacity came onstream in the second half of this year.
High ore stocks would support strong production next year.
Stocks of imported nickel ore at China's seven main ports stood at about 16.44 million tonnes last Friday, up from 16.38 million tonnes in mid-May, though the stocks was down from a record 18.2 million tonnes at the end of December 2012, data from information provider umetal.com showed.
$1 = 6.1200 Chinese yuan Reporting by Polly Yam; Editing by Michael Perry