(The opinions expressed here are those of the author, a
columnist for Reuters)
By Andy Home
LONDON, Dec 9 Crunch time is coming for the flow
of nickel ore from the Philippines to China.
The market is awaiting news of how many more nickel mines
might fall foul of a sweeping clamp down on what the Philippine
administration terms irresponsible mining.
Eight nickel mines have already been suspended. Another 14
have been put on notice.
Between them they account for around half of the country's
production, putting at risk China's nickel pig iron (NPI)
producers who have become increasingly reliant on Philippine
supply for their raw material input.
But the truth of the matter is that Philippine ore exports
are going to slow dramatically over the coming months whatever
the outcome of the current mine audit.
They always do at this time of year because of the rainy
This time around, however, normal seasonality could generate
an abnormal supply-chain shock because of low inventory in
That's what nickel bulls will tell you anyway. Bears are
unconvinced, arguing that China's NPI sector has proven itself
resilient in the past to shifts in raw material flows, so why
should this time be any different?
Uncertain as to which way to call the impact on nickel's
complex supply landscape, the market is expressing itself less
on outright price than on call options.
Graphic on seasonality of Philippine ore exports:
LOPEZ AND THE RAIN
The results of the latest audit on the mining sector are
coming imminently, according to Regina Lopez, former
environmental campaigner and now Philippine Environment and
Natural Resources Secretary.
And "there will definitely be suspensions", she told Reuters
at the start of this month.
How many and for how long she wouldn't say. Nor whether any
of those mines already suspended might be allowed to restart.
In the short term it doesn't matter much. The rainy season
is a more reliable predictor of the country's nickel ore exports
than government policy.
And exports to China are already showing signs of slowing as
they always do around this time of year.
It's just they are falling from a lower base, since they
were already running 12 percent below year-earlier levels in the
first 10 months of 2016.
And they will fall harder this year due to the near
depletion of Altawitawi Nickel Corp's Tumbagaan mine, one of the
few that could operate during the rainy season, according to
analysts at Macquarie Bank.
STRESS-TESTING THE SUPPLY CHAIN
The question facing the nickel market is not whether the
flow of nickel ore to China's NPI sector is going to slow.
It's rather how resilient will be the supply chain to the
China's stocks of nickel ore are currently estimated by
Mysteel at 13.4 million tonnes MYSTL-INKO-TTPR. It's uncertain
just how much that represents in terms of contained nickel.
But the key takeaway is that they have been falling sharply
over the last couple of months and are close to the 12.7-million
trough recorded in April at the end of the last Philippine rainy
Macquarie, which is firmly in the bull camp, argues that the
normal seasonal drawdown would mean contained nickel in ore
inventory falling below 30,000 tonnes by March, "the lowest in
recent history and equating to less than one month consumption".
(Commodities Comment, Nov. 28, 2016).
That would imply a major supply and price hit to China's
nickel-stainless steel supply chain.
Unless, of course, China can find alternative sources of
nickel feed. Which it might be able to do, according to the bear
argument articulated by Citi analysts. (Metals Weekly, Dec. 6,
Ironically, the gap could be filled by Indonesia.
"Ironically" because it was that country's own 2014 suspension
of nickel ore exports to China that created the new dependency
on Philippine ore in the first place.
Indonesia shut off all exports of unprocessed minerals to
force its mining sector down the value-add beneficiation road.
That policy is now starting to bear fruit with Chinese
players, led by Tsingshan Group, off-shoring both NPI and
stainless steel capacity in Indonesia.
There is now a large and rapidly growing flow of NPI from
Indonesia to China, almost 600,000 tonnes of it in the first 10
months of this year, already three times last year's total.
Will it be enough to offset the drop in Philippines ore
shipments over the coming rainy season? Particularly if
seasonality is overlaid with more mine closures?
There are too many moving parts to this nickel supply
conundrum to say with any certainty.
Graphic on LME call option open interest:
UNCERTAIN CALL AND CALL OPTIONS
Which is probably the reason why interest in the London
nickel options market has cranked up several gears over recent
Faced with a difficult call as to what exactly will happen
to the nickel supply chain, bulls have been expressing
themselves via call options.
Activity in London Metal Exchange (LME) nickel options
totalled almost 195,000 lots in October and November, up from
110,000 lots in the previous two months.
Outstanding open interest in call options, which confer the
right to buy, totals 14,406 lots across the first quarter of
2017. That dwarfs the 6,545 lots of open interest on put
options, which confer the right to sell.
There are noteworthy clusters of open interest on the
$12,000 strike price (3,948 lots), the $12,500 strike (1,043
lots), the $13,000 (2,575 lots) and, on March alone, on the
$13,200 strike (1,000 lots).
As of Thursday's close January was valued at $11,075,
February at $11,091.50 and March at $11,108 per tonne.
The first-quarter 2017 time frame, of course, coincides with
the seasonal drop-off in Philippine ore exports and the period
of maximum stress in China's long nickel supply chain which ends
up feeding its giant stainless steel sector.
That call option open interest is a heat map of bullish bets
that the supply chain is not going to withstand the coming test
without a price reaction.
Whether those expectations are right we're about to find
out, but it's the Philippine rain as much as the new Philippine
administration that's going to exert the biggest influence on
actual exports over the next few months.
(Editing by David Evans)