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Philippines Review Poses Upside Risk For Nickel

Commodities | Jun 27 2016

-Philippines mine closures could spark higher prices
-No supplier to China able to fill a Philippines void
-Stainless producers may choose alternatives to NPI

By Eva Brocklehurst

The Philippines presents an upside risk to nickel prices, which have been in the doldrums for some time. A surplus persists in the nickel market and analysts at Commonwealth Bank expect this situation to limit price growth in the short term.

Some aspects of the market do suggest conditions are tightening but most of the supply chain indicates a surplus will continue. The analysts expect prices to remain subdued, averaging US$3.85/lb in the second half of the year and US$3.68/lb in 2017.

Yet, a new government in the Philippines, headed by President-elect Rodrigo Duterte, intends to conduct a review of mining claims, which the analysts suspect could lead to a large fall in nickel ore production. Small mines are in danger of closing and nickel looks particularly at risk, as Mr Duterte mentioned the nickel mining region of Surigao in a forum this week. He takes office on June 30.

When Indonesia introduced its ban on exporting ore in 2014, prices for nickel jumped to US$9.50/lb, and this occurred when ore from the Philippines was considered as a likely back-up. Now, the analysts maintain that if mining of nickel ore is limited in the Philippines, the resulting shortage in China's nickel pig iron (NPI) market could mean prices spike considerably.

They note medium to low grade Filipino nickel ore is accounting for 85% of China's port inventories. Imports, while lifting on a seasonal basis, are still down on last year. China's major source of nickel ore after the Philippines is Australia and Spain, which together account for less than 5% of the country's total nickel ore imports. Hence, the analysts maintain, there are no other suppliers that can step in to fill the void.

A greater reliance on lower grades of nickel ore increases production costs for the NPI sector. The probable outcome of any Philippines decision is that China's stainless steel sector could look elsewhere for NPI, such as Indonesia, where production growth is considered promising.

If that is to no avail, the sector may then move to sourcing nickel from more expensive refined nickel imports and production. Regardless, the analysts maintain, costs in the supply chain will lift and this should support higher prices.

Meanwhile, nickel inventories at the London Metal Exchange, which account for 20% of the market, have fallen over recent months and while this may suggest a tightening market, production is resisting the low prices, given government subsidies as well as the continued potential to reduce costs. Hefty closure costs also keep loss-making smelters operational.

The analysts calculate, at current prices, that around 40% of refined nickel producers are losing money. In evidence, they cite Norilsk Nickel, which estimates loss-making nickel production globally is around 70% but only 17% of these operations are at risk of closure.

The International Nickel Study Group has forecast that primary markets will move to a deficit of 43,000 tonnes in 2016, from a surplus of 93,000t in 2015. Production is forecast to fall to 1.91mt this year from 1.98mt, as China's NPI output falls as a result of reduced ore availability from the Philippines. Adding more colour to the mix, the group also predicts nickel demand will lift 3.8% to 1.96mt in 2016.

In sum, the CBA analysts point out that China's stainless steel industry is the most important component in the outlook for nickel. The industry has the option to produce lower-cost stainless steel, with 1-5.5% nickel instead of higher quality 8-10% nickel. Yet this does not appear to be happening. Elevated levels of ferronickel and refined nickel imports suggest stainless steel makers are choosing alternatives to domestic NPI.

The analysts also emphasise the smelters have achieved this substitution without lifting prices. Of more likely concern to stainless steel producers are those countries contemplating and imposing trade barriers on anti-dumping grounds. The analysts note China's stainless exports have trended a little higher this year but consider the risks to the downside loom large.

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