Market and product

Indonesia shocked the nickel market at the start of 2014 when it made good on a commitment to ban all exports of unprocessed minerals.

With the stroke of a presidential pen the flow of nickel ore to China's nickel pig iron (NPI) producers was halted.

Indonesian mined nickel production slumped from 834,000 tonnes in 2013 to 177,000 tonnes in 2014, according to the International Nickel Study Group (INSG).

Only two local operators, Aneka Tambang and Vale Indonesia, were in a position to keep digging because they were already transforming ore into downstream products.

Now it is the turn of the Philippines to roil the nickel market.

The country, which lifted output to capitalize on the gap left by Indonesia, has been closing nickel mines on environmental grounds with another tranche of suspensions to be announced on Tuesday.

But just how big an impact will this have on nickel's supply dynamics? Particularly when there are signs that Indonesia's own production is starting to recover.

PHILIPPINE SUSPENSIONS

The new Philippine administration has already suspended 10 mines, eight of them nickel ore producers, since coming into power in June.

It is expected on Tuesday to announce another 12 suspensions for environmental violations following an audit of all the country's operating mines.

In theory, this could have a major impact on the global nickel supply landscape since the Philippines last year produced 465,000 tonnes of nickel, representing over 20 percent of world mined output.

In practice, however, it all depends on which mines are suspended.

Four producers, Nickel Asia, Global Ferronickel, SR Metals and CTP Corp., account for over 60 percent of the country's nickel ore output, according to analysts at Macquarie Bank.

All four, again according to Macquarie, "believe they can pass any audit." ("Nickel and the Philippines", July 13, 2016).

Rather, it is the smaller-scale operators that are most at risk. Many were born out of the nickel rush that followed Indonesia's early 2014 ban and many, it seems, prioritized output over environmental best practice.

And there are signs that the small-scale nickel mining sector may already have peaked even before the new government's environmental clampdown.

PEAK PRODUCTION?

Philippine nickel production fell by 24 percent to 215,900 tonnes in the first seven months of this year, according to the INSG.

Imports of ore by China, the single largest customer for Philippine nickel ore, also fell to the tune of 21 percent over the January-August period.

Since the first round of mine suspensions only took place in July, it's clear that there are other factors at work in terms of sliding national output.

The first has been the weather.

The Philippine nickel ore business is a highly seasonal one with both production and shipments tending to contract sharply during the rainy season which runs from December through March.

This year, however, the rainy season lasted longer than usual. Nickel Asia, for example, attributed a 12-percent drop in first-half sales to weather-related shipment delays.

Beyond seasonality, however, it appears that some local operators were already struggling with both low prices and ore depletion.

Macquarie forecasts, for example, that AlTawiTawi Nickel Corp,, the country's second largest operator in 2015, will see production collapse from around 60,000 tonnes to just 10,000 tonnes this year as its Tumbagaan mine nears exhaustion.

The takeaway here is that even before the mine suspensions, Philippines production was in danger of topping out after the initial nickel rush of 2014-2015.

INDONESIAN RECOVERY

Indonesian nickel production, meanwhile, is gradually recovering.

After imploding to just 130,000 tonnes contained nickel last year, production jumped by 30 percent to 98,000 tonnes in the first seven months of 2016, according to the INSG.

The reason is that the ban on unprocessed exports is starting to reap positive results in the form of a new wave of players, many Chinese, launching processing plants.

Tsingshan is the poster child for Indonesian policy. It is already shipping large amounts of nickel pig iron from Indonesia to China.

The build-out will continue with the ramp-up of a stainless steel plant, in essence capturing the whole value-added chain from ore mining to finished product.

Tsingshan, therefore, is allowed to mine nickel. So too will others following in its footsteps.

Indonesia's nickel output could climb by 36 percent to 217,500 tonnes this year, and to 363,000 tonnes in 2017, according to the Indonesian Smelter and Minerals Processing Association.

That's still a far cry from the sort of numbers generated before the export ban, but it would represent a major increase from output levels in both 2014 and 2015.

DIVERGING TRENDS

Nickel supply right now is a function of these two diverging trends, falling Philippine output and slowly recovering Indonesian production.

Global mine supply is still down on year-earlier levels to the tune of 6.5 percent, according to the INSG.

Lower ore output, moreover, has fed through to lower refined production which, combined with strong demand, particularly from China's stainless sector, has pushed the market into cumulative 42,500-tonne supply deficit so far this year.

The problem for nickel bulls, however, is that this deficit is still small relative to the stocks build that has taken place over the last couple of years.

Moreover, China's nickel pig iron sector continues to defy expectations of its imminent collapse.

It has survived the Indonesian ban and is leading the investment wave in the country's build-out of processing capacity.

And it shows every sign of surviving constrained production and shipments from the Philippines, even if it means using higher-value forms of nickel in its blending mix with ore.

Unless the Philippine audit process brings down one of the big four producers, the worst of that country's output decline may already have taken place.

Indonesian production, meanwhile, looks as if it has passed the worst of its own policy storm and is now in recovery mode.

Which may be why the London nickel price, currently trading at US$10,500 per tonne, is only the third best performer so far this year after zinc and tin.

All three are buoyed by bullish supply narratives but nickel's continues to be a complex web of multiple moving parts. - Reuters