Tough love for mining increases ore costs but hike seen temporary

By Janina C. Lim, Reporter

Ore prices are getting a boost from an unlikely source, but analysts see this upswing as temporary.

President Rodrigo R. Duterte has been talking tough on mining, capping that with last month’s appointment as Environment and Natural Resources secretary of a known industry opponent, self-styled environmentalist Regina Paz “Gina” L. Lopez of the Lopez Group, which has investments in one of the country’s biggest media companies as well as in the largest geothermal energy producer.

“The much-anticipated climb in global nickel prices finally happened last week [July 4 to July 8], with help from no less than President Duterte himself,” Luis A. Limlingan, managing director at the Regina Capital Development Corp. (RCDC), said in an e-mail to ����ý.

“International sentiments converged on the idea that Duterte could impose an Indonesia-style raw ore ban, on an anti-mining platform, and disastrously disrupt Chinese supply chain,” Mr. Limlingan said.

In January 2014, Indonesia, which accounts for approximately 15% of global ore supply, imposed a ban on ore exports. Top nickel importer, China, has since turned to the Philippines, whose capacity to export nickel however is lower than Indonesia’s.

Before its ban took effect, Indonesia produced 72,000 metric tons a month of nickel ore and concentrates, nearly threefold that of the Philippines’ 27,700 in 2013.

“Another factor pushing nickel prices are expectations of lower nickel pig-iron exports from the country,” Mr. Limlingan said, adding that Chinese imports of local ore fell 27% in the last five months.

Gina Lopez appointment a trigger

Philippine ore producers had warned that output would be cut down this year due to low prices.

Koichi Ishihara, vice-president for marketing and procurement at the country’s top producer, Nickel Asia Corp. (NAC), expects global supply to turn into a deficit starting June.

“As forecasted, tight supply was well confirmed among nickel players in early Q2 (second quarter) but nickel price didn’t react so much,” Mr. Ishihara said in a mobile message.

The appointment of “Gina Lopez just gave a trigger to the [nickel] price increase,” Mr. Ishihara said.

Tight nickel supply is expected to persist until next year, but the world’s inventory “is too huge so [nickel] price increase will be capped at [a] certain level,” he said.

NAC has forecast nickel prices at approximately $11,000 per ton, or no more than $12,000 towards the end of the year.

Supply deficit, weak dollar

Ralph Christian G. Bodollo, equity research analyst at RCBC Securities, Inc., cited Australia’s BHP Billiton, the world’s largest miner, which is projecting a rebound in nickel ore prices through the second half of this year.

The rebound is seen due to an expected supply deficit. A price slump since last year compelled nickel producers to cut output, but demand is seen to persist. BHP Billiton forecasts a recovery of as much as 15% from the May level to $9,926 per ton by year-end.

“In my own view, the weak (US) dollar, which may still go down further in the year due to the gloomier probability of Fed rate increases, would also contribute to nickel ore price recovery this year or early next year,” Mr. Bodollo said.

The US Federal Reserve in its last policy meeting dropped hints it would go slow in raising interest rates, pressuring the greenback.

“This may cause an uptrend in nickel ore prices and once that uptrend appears, the whole industry will accelerate the inventory buildup, thereby stimulating demand further, again in my view,” Mr. Bodollo said.

RCDC’s Mr. Limlingan cited historical data, which shows nickel has the greatest upside potential when the overall commodities market is in bullish mode.

“RCDC would like to point out that 2016 might not be as optimistic as think tanks wanted it to be, coming into the seventh month without as much as a fundamental lead on nickel’s comeback,” he said.

“Although nickel’s fundamentals do not appear completely bullish, metals are getting [a] push from investors jumping into the industrial metal complex,” he added.

Regulatory risk

Another key risk on the domestic front is a hostile regulator.

Last June 21, Ms. Lopez accepted the President’s offer to head the Department of Environment and Natural Resources. On that day, the mining and oil sub-index of the Philippine Stock Exchange lost 4.09%.

Ms. Lopez’s first directive left no doubt as to her position: audit all mining operations to check their compliance with environmental standards and freeze applications for new projects.

She also ordered the suspension of two nickel miners in Zambales, citing the Writ of Kalikasan issued by the Supreme Court and a halt to all mining operations ordered by the newly installed provincial governor.

This reduced by half the number of operating nickel miners in the country.

“[Mining] companies are always at the mercy of commodity prices which they cannot control. Equally important or if not more important, the regulatory risk in the mining sector is high that even if you have favorable metal prices, a hateful government regime can bring mining companies to their knees,” RCBC Securities’ Mr. Bodollo said.

“The case of Gina Lopez’s appointment as DENR Secretary was a case [in] point,” he said.

JANINA C. LIM (@YnaCarlosLim on Twitter) covers the agriculture and environment beats for ����ý.