The opinions expressed here are those of the author, a columnist for Reuters.
(Reuters) – News that the Philippines was preparing to follow Indonesia in banning exports of unprocessed minerals caused panic in the London nickel market last week.
The Philippines has emerged as the main supplier of nickel ore to China’s massive nickel pig iron (NPI) sector after the cessation of exports from Indonesia. The threat that this flow too would be cut off appeared to represent a dramatic acceleration of an already bullish story.
Until it emerged on Tuesday that any Philippines ban is several years away. On the London Metal Exchange (LME) benchmark three-month nickel collapsed by $1,000 per tonne to $18,925 on Tuesday, wiping out the gains notched up over the previous days.
However, the market might be overly complacent about the apparently extended time-line before any Philippines ore ban, if it’s collectively assuming that events in that country will mirror those in Indonesia.
What is less in doubt is what the recent price roller coaster says about the bullish mindset in this market, particularly its responsiveness to supply-side news.
THE IMPORTANCE OF PHILIPPINE ORE
Ever since January, when Indonesia introduced a complete ban on exports of ore, nickel has outperformed all the other base metals traded on the LME.
Understandably so, since at the stroke of a presidential pen, Indonesia has cut off around a third of global nickel mine supply.
At risk are China’s many NPI producers, who have emerged as a major source of nickel supply for the country’s stainless steel sector, but with a critical dependency on Indonesian ore as their primary source of raw materials.
The bull impetus had, until last week, been stalled by the apparently inexorable rise in LME inventory, a sign that the world is not yet short of nickel.
But from the bulls’ perspective, it is just a matter of waiting until what is viewed as the inevitable reduction in NPI production feeds through into the global refined nickel market.
The time-line is inexact and problematic, though, since it hinges on several moving parts.
How long will it take NPI operators to run down the stocks of ore accumulated ahead of the January ban? How successful might they be in finding replacement sources of feed? And how fast can they build NPI plants in Indonesia as required by a government aiming to force its mining sector down the value-added path?
The Philippines holds the answer to two of those questions. It has traditionally been the second-most important source of nickel ore for Chinese NPI producers, although the ore tends to be lower quality than that from Indonesia.
It is now the only source of ore and shipments have boomed in response to China’s appetite for replacement feed. China’s imports from the Philippines were a record 5.0 million tonnes in July with cumulative imports up 15 percent so far this year.
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