May 11, 2017 / 5:10 AM / 2 months ago

COLUMN-Nickel ore oversupply looms, threatening refined prices: Russell

6 Min Read

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Clyde Russell

LAUNCESTON, Australia, May 11 (Reuters) - It may be going from bad to worse for the nickel price, with conciliatory comments from the new mining minister in top ore producer the Philippines adding to the risks of the market being pushed into oversupply.

Former army general Roy Cimatu was appointed by Philippine President Rodrigo Duterte on May 8 to replace Regina Lopez, whose confrontational approach to mining won her friends among environmentalists but not among enough politicians, resulting in her dismissal by the Southeast Asian nation's Congress.

Cimatu was cautious in initial comments to the media, in stark contrast to the firebrand approach of his predecessor, who shut down almost half the country's mines, citing environmental breaches.

"There are countries where mining contributes a lot to the economy and environmentalists are not screaming," Cimatu told Reuters in a phone interview on May 9. "I think it can be done ... (balancing) environment (protection) and responsible mining."

While Cimatu will likely take several weeks to come to grips with his portfolio, his comments suggest that miners can breathe easier.

While it may be a challenge for some of the closed mines to re-open, the risks are now that they may be able to do, thereby boosting output of nickel in the world's largest exporter of the ore, which, once refined, is mainly used to make stainless steel and other alloys.

This means it's possible that the Philippines may end up with more nickel ore available for export, instead of less, as the market was expecting under the dismissed environment minister.

These additional supplies will be coming to market just as Indonesia relaxes its ban on exporting unprocessed nickel ore, which has been in place since the start of 2014.

In some ways Indonesia and the Philippines have been playing an uncoordinated game of tag in the nickel market.

The Indonesia ban initially raised fears of a shortage of ore, but the Philippines was largely able to step into the gap and meet the needs of China, the world's top buyer of nickel ore.

Then last year, mines in the Philippines started being shut, leading to a drop in Chinese imports, and once again leading to concerns about supply.

However, Indonesia returned to the game as a major exporter of semi-processed nickel, once again ensuring China was able to access sufficient metal for its needs, albeit in different stages of beneficiation.

Oversupply of Ore Coming?

Chinese customs data shows the gyrations in the nickel market, with imports of ores and concentrates down 11 percent in the first quarter from the same period last year to 3.03 million tonnes.

Imports from the Philippines slumped 20 percent to 2.32 million tonnes, accelerating from the 11-percent drop for 2016 as a whole.

Imports of ferronickel leapt by 76 percent in the first three months of 2017 to 335,367 tonnes, with Indonesia easily he top supplier at 231,7932 tonnes, a gain of 106 percent.

It's worth noting that Indonesian ferronickel isn't of the same quality as that supplied by other countries, with a lower percentage nickel content, making it cheaper and more appealing to Chinese nickel processors.

The trick is trying to work out how oversupplied the market for nickel ores and ferronickel may become, assuming the Philippines doesn't close any more mines and even re-opens some.

If the Philippines managed to match this year the 30.5 million tonnes of ore it sent to China in 2016, it implies that imports for the April to December period would have to average around 3.1 million tonnes a month.

That's not beyond the scope of what the Philippines can produce, but it's most likely an optimistic scenario.

More likely is that the second half sees a modest acceleration in exports of nickel ore.

It's also highly unlikely that Indonesia will return to claim its former mantle as the top exporter of nickel ore, with officials suggesting a figure of 15 million tonnes for 2017, or about a quarter of what it shipped out in 2013, the year before the export ban was imposed.

But even so, this level of exports would likely be far in excess of China's demands, even assuming nickel pig iron producers were able to ramp up production.

This implies that the price of nickel ore is likely to struggle, which will in turn effect prices further up the nickel value chain.

The spot assessment of Chinese nickel ore with a 1.8 percent concentration NI-ORBCNC-MB has been losing ground since peaking around $65 a tonne in December, dropping to $50.50 in the week ended May 9.

This is still above the $39.50 a tonne that prevailed in late June last year, just prior to the appointment of Lopez as Philippine environment minister.

Further up the value chain, London-traded nickel futures ended at $9,120 a tonne on Wednesday, down 18 percent from their closing peak so far this year of $11,150 on Feb. 20.

They are still above the $7,595 a tonne post-2008 recession low it hit in February last year, and their best hope of avoiding testing that level is for demand to grow.

The International Nickel Study Group is forecasting that demand will outstrip supply this year, but that may be changed if both the Philippines and Indonesia ramp up exports of cheap nickel ore to Chinese smelters.

Editing by Joseph Radford

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