Singapore 06/10/2016 - The Philippines’ nickel production is expected to decline this year due to its mining clampdown and heavy rains which hampered mining and shipments earlier this year. But the possibility of Indonesia restarting nickel ore exports threatens to more than negate the Filipino shortfall.
The Philippines released its mining audit results in late-September and had recommended another 20 miners - those producing nickel and other minerals - to be suspended for environmental violations on top of ten which were already ordered to do so prior to the completion of its review.
Based on assumptions that suspensions could start in October, JP Morgan estimated in a report earlier this week that the maximum impact could be a suspension of 18 nickel mines – including those suspended before the review - which would affect almost 150,000 tonnes of annualised production or 135,000 tonnes at a 90-percent recovery rate – this equates to 32 percent of last year’s Filipino nickel mine output.
Should all the suspensions be carried out, an incrementally tighter nickel market over the next six months is likely, the report said.
“If production restrictions are put in place, Chinese shipments and hence Chinese nickel pig iron (NPI) production would predominantly be impacted,” it said.
The actual number of suspensions and when they could happen still highs in the air following the announcement of the mining audit results.
The 20 miners are given a week to respond to the allegations but any suspension could even take up to a month to happen given the time allowed for delivery of orders and negotiations between the government and companies, market observers pointed out.
For one, Nickel Asia Corp (NAC), whose subsidiary Hinatuan Mining Corp (HMC) was among the 20 has said on Monday that it has not received any formal communication from authorities and that HMC is still operating under normal conditions.
JP Morgan also noted that there has been a recent softening in tone by Filipino environmental authorities which said they would help firms address issues raised in the audit.
"[This] leads us to believe compromises will likely be made over the coming weeks on both sides, avoiding this max level of tightness and reducing its ability to pressure nickel prices higher from here," it added.
Filipino nickel ore production this year is expected is to fall 24 percent to 353,000 tonnes (contained nickel) this year, JP Morgan forecasted.
What complicates the overall supply picture now is Indonesia, whose mining minister, Luhut Pandjaitan, said in a Reuters report on Monday that the government is looking to change its export rules for nickel ore which has 1.8-percent metal contained as they cannot be processed domestically.
While there were no details on how this rule relaxation could be carried out – for instance if there would be a quota system and whether all or a few companies would qualify for exports – market participants are now concerned that an easing of the ban introduced in 2014 would deter smelter investment plans in the country while undermining nickel prices.
“The Indonesian government thinks that 1.8-percent ore that makes medium-grade NPI or ferronickel cannot be processed in Indonesia viably at present and hence wants to permit exports,” a Singapore-based nickel analyst with a major Asian bank told FastMarkets.
“Saprolite access will put many NPI producers in China back in competitive play,” he said.
Indonesia had exported around 52 million wet metric tonnes of saprolite nickel ore of around 1.8-percent nickel in 2013, and this contrasts with the five million wmt of saprolite ore exported by the Philippines in the same year, the analyst estimated. The majority of the nickel ore the Philippines exports are the low nickel limonite ore of 1.2-1.5-percent nickel.
Already, China’s NPI production so far this year has turned out more resilient than expected – JP Morgan estimates’ Chinese annualised NPI production at around 370,000 tonnes per year in the year-to-August, above its estimate of 340,000 tonnes per year.
The London Metal Exchange three-month nickel price has come under pressure from the possible rule change in Indonesia falling to as low as $9,945 per tonne - the lowest since September 19 – on Tuesday, October 5. It was last at $10,110 on Wednesday, October 6, on Select, down $30 from its previous day’s close.