London 18/07/2016 - Major banks are divided on whether the current and potential supply-side disruptions from the Philippines can decisively turn the nickel market around, and price outlooks differ accordingly.
Nickel prices reached year-to-date highs of $10,670 per tonne on July 13 on fears of supply disruptions from the Philippines, due to potential mine closures following an environmental audit of the mining industry.
“Our analysis suggests fears over the extent of restrictions are being overplayed… we remain unconvinced that the year-to-date rally is likely to be sustained,” Citi said in its research note on Monday.
The bank forecasts nickel prices to peak this quarter before moderating to average $9,200 per tonne and $8,800 per tonnes in the third quarter and fourth quarter respectively. And the average is expected to be $8,855 per tonne for 2016 as a whole.
The Philippines ore flow is not likely to be severely impacted, while refined nickel inventory, including off exchange tonnage, remains elevated, it noted.
Four major mining companies, which accountrf for around 65 percent of Philippines ore production in 2015, are either ISO 14001 compliant - a standard geared towards managing environmental responsibilities - or claim to have the approvals in place.
Smaller mine operators have already ceased mining activity, due to low ore prices, resulting in a 27 percent reduction in ore shipments to China so far this year.
“We therefore suspect that the impact of environmental license suspension may be more limited than initially feared, and believe the recent rally will run out of steam,” the bank said.
It also said there is a considerable overhang of metal amounting to around one million tonnes that is likely to cap prices in the mid-term.
By contrast, Macquarie is more pessimistic, citing a worst-case scenario of many small and large mines being forced to close in the short and possibly medium-term. Another concern is that new replacement mines will fail to get environmental permits, as grades decline and reserves are exhausted at existing mines, it added.
“There is great uncertainty about the duration and the results of the audit,” the bank said, adding that developments in the Philippines really do matter for nickel.
So far, 2016 has been a disastrous year for mine production in the Philippines, with overall exports of nickel-in-ore down more than 30 percent year-on-year in January to June mainly due to weather-related disruptions. And the environmental audit could lead to an even bigger disruption to supply, Macquarie noted.
It forecast the price averaging $9,262 per tonne this year and $11,625 per tonnes in 2017.
Macquarie’s view was echoed by BofA Merrill Lynch, which estimated that 30 percent of production, equal to around 120,000 tonnes of nickel units, is at risk of being non-compliant.
“Results from the audits will be reported in August and there is a risk of further supply losses,” BofA said in its latest research note.
LME three-months nickel was last at $10,530 per tonne, up $260 from Friday’s close, having earlier peaked at $10,545.
(Editing by Martin Hayes)