February 24, 2017 / 1:06 PM / 5 months ago

COLUMN-China's nickel imports mirror shifts in supply chain: Andy Home

7 Min Read

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

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By Andy Home

LONDON, Feb 24 (Reuters) - Is the Philippines' draconian mining clampdown already affecting the flow of nickel ore to China's nickel pig iron (NPI) producers?

It certainly looks that way.

Exports of ore to China always drop at this time of year due to the rainy season, which affects both mining and shipping.

But China's trade figures for January showed imports of Philippine nickel ore were still 20 percent lower than last year's level. And the betting is that they will continue trending lower after the Philippines' feisty environmental minister, Regina Lopez, ordered the closure of over half the country's mines, many of them nickel operations.

Nickel bulls, however, should be wary.

China's import picture is also one of growing diversification of supply, not least from Indonesia, the other political wild-card in the nickel supply chain.

Graphic on the seasonality of Philippines nickel ore imports:

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The Politics of Ore

China's imports of ore from the Philippines were 779,000 tonnes last month, the lowest January reading since 2012, when the country was still a second-tier supplier after Indonesia.

All that changed when Indonesia enacted its ban on the export of unprocessed minerals, including nickel ore, at the start of 2014.

The Philippines stepped into the gap left by Indonesia and has since become China's dominant nickel ore supplier.

Hence the market excitement when Lopez lived up to her previous eco-warrior credentials and ordered the closure of 23 mines and the suspension of five others, putting at risk close to 9 percent of global nickel supply.

The political storm is still raging in the Philippines itself but January's low imports may well be the first sign of what to expect going forwards.

So too, though, might be the fact that China's overall nickel raw materials imports were still up by 4 percent in January despite that sharp drop in Philippine supply.

And key to that pick-up was the apparent resumption of imports from Indonesia. China bought 123,300 tonnes from Indonesia in January, the highest monthly tally since April 2014, when Indonesian exports were winding down after the implementation of the export ban.

Indonesia has this year generated its own nickel supply shock by saying it will partly relax its ban on nickel ore exports, albeit with a series of complex caveats.

Has someone already started shipping ore? It seems unfeasibly fast given the government only announced its revised policy last month. And there have been occasions in the past when China's customs department misclassified iron ore with high nickel content as nickel ore.

However, this particular component of China's nickel import picture will bear close scrutiny in the months ahead as the market tries to calculate the net impact of less ore from the Philippines and more from Indonesia.

Diversifying

The broader trend in China's nickel raw material imports, however, is one of diversification in terms of both geography and materials.

New Caledonia, in particular, has emerged as a new ore supplier to China.

Imports totalled 492,000 tonnes last year, compared with zero in 2015, and another 108,000 tonnes entered China last month, the highest monthly total since 2007.

The supply uncertainty generated by the Philippines and Indonesia has been something of a blessing for New Caledonian producers, who were left reeling by last year's closure of their main customer, Australia's Queensland Nickel.

The New Caledonian government authorised the export of 700,000 tonnes last year and has upped the quota this year, albeit with the slightly curious stipulation that ore can't be sold to Chinese NPI producers.

But whoever's buying the stuff, it's clearly entering China and in increasing quantities.

The second major trend at work in terms of China's nickel supply is the amount of nickel pig iron that is now coming directly from Indonesia.

This reflects the build-out of processing capacity, led by Chinese players, in the country. This, after all, was the intended political aim of the 2014 ban in the first place.

Confusingly, this Indonesian material is lumped into the "ferronickel" category by Chinese customs, but the give-away is its relatively low value. The average import price in January was $1,512 per tonne, compared with $3,000-4,000 per tonne for suppliers from other countries.

Imports of "ferronickel" from Indonesia mushroomed to 747,000 tonnes last year from 214,000 tonnes in 2015. And the trend is continuing to accelerate with January's imports of 88,135 tonnes the second highest monthly total on record and more than double last year's figure.

Resilience

There's one more detail in the January trade picture that should give nickel bulls food for thought.

Imports of ferronickel from the Dominican Republic totalled 780 tonnes in January.

The Caribbean country only emerged as a supplier to China in the second half of last year. Actually, that should read "re-emerged" since it was once a steady exporter.

But Glencore placed its Falcondo nickel operations on care and maintenance towards the end of 2013. It was one of only a handful of price-related closures in a supply chain that has been found to be stubbornly price inelastic even while politically sensitive.

Glencore sold Falcondo to a private company called American Nickel Ltd in 2015 and the inference from the Chinese trade figures is that some production at the 30,000-tonne year operations has resumed.

If it has restarted, it will represent another piece in China's increasingly diverse nickel supply chain.

The country's resilience to politically motivated supply shocks should not be underestimated. It weathered the Indonesian ban and looks to be positioning itself to mitigate the impact of the Philippines' mines closures.

If the country were really short of nickel raw materials, a sure sign would be a squeeze on refined metal.

But there are over 89,000 tonnes of nickel sitting in warehouses registered with the Shanghai Futures Exchange.

And China's net refined nickel imports in January of 11,892 tonnes were the lowest monthly tally since April 2015.

There are many moving parts to this nickel supply story, but for now at least China is not running short of units - whatever form they may take.

Editing by Susan Fenton

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