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Alternative Sources Unable To Replace Nickel Lost Due To Indonesian Ore Ban

Highlights

Mitzi Sumangil contributed to this article.

London Metal Exchange nickel prices surged during the third quarter of 2019 on speculation that the Indonesian government will bring forward its ban on nickel ore exports, which it originally planned to reintroduce in 2022. On Aug. 30, the Indonesian government confirmed the ban, effective Jan. 1, 2020. The new ban will cover ore exports with nickel content below 1.7%, which, combined with a 2014 ban on higher-grade nickel exports, will halt all nickel ore exports from the country. This news caused the LME three-month nickel price to jump to a five-year high of US$18,850 per tonne Sept. 2.

Amid the continued downward trend in LME nickel stocks, the price has exhibited volatility in October. Following the reported placement of a large sell order on the exchange Oct. 14, the price dropped toward US$16,000/t on Oct. 22. The price then recovered to trade around US$16,790/t at the time of writing, partially on news that the 32,000-tonne-per-year of contained nickel Ramu mine in Papua New Guinea will close imminently, pending an environmental investigation. Despite these moves, the price is 57% higher compared with the end of 2018, principally on the confirmation of the early implementation of the Indonesian nickel ore export ban.

One of the long-term objectives of Indonesia's latest nickel ore export ban is to reduce the extraction rate of the country's nickel ore reserves so the material can be mined more sustainably and can fuel the growing domestic nickel-processing industry. S&P Global Market Intelligence forecasts Indonesia to be the world's largest mined nickel-producing country on a contained basis in 2019, with output expected to hit 726,300 tonnes. In addition, according to our asset data, 72 million tonnes of nickel in reserves have been announced at four assets in Indonesia since 2016, with a further 37.2 Mt hosted in resources. The country hopes to capitalize on existing operations and future production potential to maximize its downstream nickel industry.

The second major objective of the ban is to increase the revenue from domestic processing of ore by increasing the country's output of value-added products. This was also one of the aims of the original Indonesian nickel ore export ban, which was implemented Jan. 11, 2014, and then relaxed in January 2017. As part of this drive to produce more value-added products, Indonesia plans to develop a presence in the electric vehicle battery industry. Several large processing plants designed to provide intermediary nickel products are being constructed. Among them is Huayue Nickel & Cobalt's US$1.28 billion plant in Morowali, which will have capacity to produce 60,000 t/y of nickel in metal.

Given its timing, we expect the ban to have a substantially negative impact on output from the Chinese nickel pig iron, or NPI, sector — the main consumer of Indonesian nickel laterite ore — in 2020 and 2021. During the previous Indonesian nickel ore export ban, the Philippines was able to increase mined nickel output and therefore nickel ore exports to China, offsetting the loss of material from Indonesia. Philippine nickel miners are expecting to increase their nickel ore output in 2020 to fill the gap left by Indonesia, according to the president of the Philippine Nickel Industry Association.

A key question facing nickel markets is whether the Philippine mining sector will actually be able to supply the nickel ore required to support the Chinese NPI production industry.

Philippines not expected to offset loss of Indonesian nickel ore

When the original Indonesian ore export was implemented in 2014, the Philippines reacted by significantly increasing its nickel mined production, from 315,000 tonnes in 2013 to a peak of 494,000 tonnes in 2015, according to our supply estimates. Chinese nickel ore imports from the Philippines consequently also increased, from 29.7 Mt in 2013 to a peak of 36.5 Mt in 2014, according to trade data from United Nations Comtrade. In the absence of Indonesia, the Philippines became China's leading supplier of nickel ore in 2014 and retained the position even after the original Indonesian nickel ore export ban was relaxed. Trade data shows that China imported 47 Mt of nickel ore and concentrate in 2018, with the Philippines accounting for 64% as China's main supplier and Indonesia for 32%.

Based on the above statistics, the market is looking to the Philippines to be the main candidate to fill the gap left by Indonesia and provide the missing feedstock to support China's NPI industry during the upcoming ban. We believe, however, that the Philippines' ability to do so will be limited by various factors.

One of these restrictive factors is the Philippines' commitment to preserving its environment. The country currently has a moratorium on new mining projects for environmental reasons, known as Executive Order Number 79, or EO 79. The order was originally imposed in July 2012 "until a legislation rationalizing existing revenue-sharing schemes and mechanisms shall have taken effect." It was reinforced by former Environment and Natural Resources Secretary Regina Lopez in July 2016, who argued that open pit mining activity violates the constitutional rights of the Philippine people to a clean and healthy environment. A proposal by the country's Mining Industry Coordinating Council to lift the ban was rejected by Philippine President Rodrigo Duterte in November 2017.

Growth in Philippine mine supply will be further constrained by government-ordered suspensions at some of the country's existing nickel mines, also due to environmental concerns. In 2017, the Philippine government ordered the "shutdown" of 16 nickel-producing mining companies. These assets are not allowed to excavate and can only ship ore from their existing stockpiles. In 2018, a third-party assessment covering 19 nickel mines found that two mines failed the audit, both of which are in the process of appealing the decision; another five nickel mines were recommended for suspension or do not meet current environmental regulations. Nickel ore from mines that remain suspended in the Philippines amount to about 4 million wet tonnes, based on a rough figure provided to us during the recent Mining Philippines 2019 Conference by the country's Mines and Geosciences Bureau director, Wilfredo Moncano.

In mid-September, the government of the Bangsamoro Autonomous Region in the southern Philippines indefinitely suspended mining at four unnamed high-grade nickel mines in the country's Tawi-Tawi island province while an industry audit is being conducted. In addition, SR Languyan Mining Corp., the Philippines' top exporter of high-grade nickel ore, is expected to stop mining operations at its facility in the Tawi-Tawi before the end of the year as ore deposits at a project are nearly depleted. SR Languyan exports an average of about 416,500 wmt of nickel ore per month, according to the Philippine's environment, natural resources and energy minister. Philippine nickel ore mining activity is also restricted by the country's rainy season and usually starts in April and ends in October every year.

Nickel Asia Corp. recently announced that it will increase production at the Cagdianao nickel mine in the Philippines by 300,000 wmt in 2020, ahead of the nickel ore ban. It was then announced that the suspension of Philippine nickel miner Zambales Diversified Metals Corp. has been lifted by the local government. Activity at Zambales was suspended in July 2016 due to alleged "social issues," according to the mine's parent company, DMCI Holdings Inc. We expect the Cagdianao and Zambales mines to target the Chinese market, where material is expected to be short due to the ore ban. We calculate, however, that these mines will only produce an additional 3,175 tonnes of contained nickel in 2020, or just 1.29% of Chinese imports from Indonesia in 2018 on a contained nickel basis.

As a result, we have incorporated only marginal growth of 3.8% and 3.1% annually in Philippine mine supply in 2020 and 2021. We forecast Chinese nickel ore imports from the Philippines to rise from 30 Mt in 2018 to 35.5 Mt in 2021 — close to the peak reached during the previous Indonesian nickel ore export ban, but not enough to negate the loss of material from Indonesia.

Significantly lower Chinese NPI production expected due to ban

We believe there are few alternative supply sources for the required nickel laterite ore material. New Caledonia and Guatemala were the third- and fourth-largest external sources of Chinese nickel ore in 2018, with imports totaling 1.5 Mt, according to trade data. We forecast these imports to rise but only to add 1.75 Mt between 2019 and 2021.

Chinese NPI output will find some support from the lagged arrival of nickel ore exports from Indonesia in the early part of 2020, based on expectations that Indonesian producers will export more material to China ahead of the ban. We also expect that Chinese NPI producers will use nickel laterite ore ports stocks. Chinese nickel ore stockpiles stood at 12.4 Mt as of Sept. 20, according to Antaike, with material of Philippine and Indonesian origin accounting for 9.73 Mt and 2.57 Mt, respectively, according to our estimates. We estimate that Chinese nickel port ore stocks could feed about three months of domestic NPI output.

These alternative sources are, however, not expected to compensate for the loss of Indonesian nickel ore to China. Since the new ore ban was confirmed, we have significantly downgraded our Chinese primary nickel production forecast by 150,000 tonnes and 144,000 tonnes in 2020 and 2021, respectively. We expect Chinese primary nickel output to fall from 736,000 tonnes in 2019 to 646,000 tonnes in 2021.

Indonesian NPI production to expand further but not nullify lower Chinese NPI output

We expect that lost Chinese primary output will be partially offset by the continued expansion of Indonesia's own NPI sector as part of the government's long-term aim to produce more value-added products. The original Indonesian nickel ore export ban helped Indonesian primary nickel production rise from 18,300 tonnes in 2013 to 204,000 tonnes in 2017. The country expects to increase its number of working nickel smelters from 11 currently to 36 by 2022, according to recent comments from the director general for coal and minerals at the Indonesian Ministry of Energy and Mineral Resources.

S&P Global Market Intelligence has compiled a selected list of seven NPI plants with a total capacity over 550,000 t/y of nickel in NPI that are currently under construction in Indonesia. Leading the way in the growth of the Indonesian NPI sector is China's Tsingshan Holding Group Co. Ltd. The company is currently capable of producing 150,000 t/y of nickel in NPI. Tsingshan plans to increase its Indonesian production capacity of nickel contained in NPI to 435,000 t/y to facilitate the construction of 3 Mt/y of stainless steel production capacity. Among their projects are the 117,000-t/y nickel-in-metal capacity Tsingshan/Zhenshi Weda Bay joint venture plant in Halmahera in the North Maluku province of Indonesia. The plant is currently under construction and is expected to start producing in 2020.

We have raised our forecasts for Indonesian primary nickel output by 50,000 tonnes and 100,000 tonnes in 2020 and 2021, respectively, and expect primary output to reach 468,000 tonnes by the end of the forecast period. Indonesia will nevertheless not be able to offset the reduction in Chinese nickel in NPI output over the forecast period.

Substantially tighter market fundamentals and higher prices expected

Additional primary output will come from the restart of Vale's 53,000-t/y Onca Puma ferronickel plant in Brazil. Operations at the plant were suspended in June due to Brazilian court orders following allegations of pollution at a nearby river. The facility was granted permission to restart by the Brazilian government Sept. 12, and operations resumed Sept. 27. We currently expect Onca Puma to ramp up output to roughly 28,000 tonnes by 2020 — near the plant's production rate before it was suspended. We nevertheless forecast emerging nickel output constraints resulting from the Indonesian export ban to cause global nickel primary supply to rise by just 1.49% between 2019 and 2021, versus an expected 4.3% increase in global primary nickel demand over the same interval. This will result in large primary market deficits, underpinning our expectation that the average LME three-month nickel price will increase from US$14,150/t in 2019 to above US$16,000/t in both 2020 and 2021.

These expectations for a tighter market and higher prices come with some risks, however, mainly from the supply side.

1) Philippines lifts current moratorium on new mining projects

A significant downside risk to long-term expectations for higher nickel prices is the potential that the Philippine government — tempted by the potential for increased revenue that could result from the absence of Indonesia from the global nickel ore market — could lift its current moratorium on new mining projects. House Bill Number 8400, or HB 8400, which aims to rationalize and institute a single fiscal regime applicable to all mineral agreements, was approved on the third reading by the Lower House of the Philippine government in 2018 and has been passed to the country's Senate for further deliberations.

If HB 8400 is passed into law, then the EO 79 moratorium on new mining projects could be lifted, allowing Philippine miners to tap into their nickel reserves and resources. According to asset data we have captured, 5.2 Mt of nickel in reserves have been announced at 11 assets in the Philippines since 2016, with an additional 9.5 Mt hosted in resources. The removal of EO 79 would increase the likelihood that the Philippines could fill a greater proportion of the gap left by Indonesia by exporting more material to China. However, it is likely that HB 8400 would require miners to pay higher taxes on their output for it to be passed. This would lead to higher costs for the miners, which would put some downward pressure on their production volumes.

2) Philippine government lifts more mining suspensions

It is possible that the Mines and Geosciences Bureau could lift further mine suspensions before the end of the year. If some suspended miners are allowed to resume operations, then the Philippines could export more nickel laterite ore to China, which would support NPI production and reduce the anticipated supply gap.

3) Chinese NPI producers opt against using Philippine nickel laterite ore

A significant upside risk to our view is the possibility that Chinese NPI producers could be reluctant to use nickel laterite ore from the Philippines because it is typically lower grade than the equivalent material from Indonesia. The former tends to have nickel content between 1.28% and 1.4%, and the latter has grades of 1.65% or higher. Using Philippine ore as a substitute for Indonesian material could lead to higher production costs for Chinese NPI producers, because using lower-grade ore feedstock requires more energy to convert to NPI.

This technical obstacle could also have a negative impact on the use of existing port stocks by Chinese NPI producers, given that most of that inventory comes from the Philippines. In this scenario, producers may not be able to tolerate such higher costs, meaning that the impact of the ore ban on Chinese NPI output could be more severe than we expect. This risk could be mitigated by Chinese NPI companies resorting to mixing lower-grade Philippine material with stockpiled Indonesian ore to raise purity to the minimum required levels, as was a common practice during the previous nickel ore ban.

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