The DSO Market in Flux
The seaborne laterite market has been thrown in turmoil with the recent announcement that Indonesia will relax its ore export ban. This will see the once dominant player in the DSO market return after a three-year hiatus. Furthermore, the Philippines Department of Environment and Natural Resources delivery of its Final Mining Audit Report, has resulted in the DENR calling for even more significant closures than anticipated by the industry. The uncertainty in DSO supply will provide significant volatility to the nickel market in 2017.
To recap recent
developments in the Philippines:
- The election of Rodrigo Duterte at the end of June last year and his decision to appoint the well-known anti-mining advocate Regina Lopez to head the DENR heralded a significant change in policy towards mining in the country. Cracking down on the environmental and social performance of miners across the Philippines, Lopez initiated an audit of all mining operations.
- By August, eight mines had been suspended including six major DSO operations, which in 2015 produced 57kt of contained nickel comprising 13% of total national mined output.
- A further 20 mines were recommended for suspension in September, including 14 nickel DSO operations, which produced 174kt of contained nickel in 2015, comprising a further 41% of national output.
- This left 11 mines nationwide not suspended or recommended for suspension, including four of the largest DSO mines—Nickel Asia’s Taganito (65kt in 2015), Rio Tuba (61kt) and Cagdianao (18kt) mines, as well as Global Ferronickel Holding’s Cagdianao mine (54kt) operated via subsidiary Platinum Group Metals Corporation (PGMC).
- On February 2 this year, the final results of the Mining Audit were delivered, with Berong Nickel and Citinickel remaining listed for suspension, while all other operations already identified by the DENR were identified for closure with only a few notable changes—SR Metals’ large Tubay mine which produced 34kt in 2015, previously recommended for suspension was no longer listed for closure or suspension, while Global Ferronickel Holdings’ very large 54kt Cagdianao (PGMC) mine, previously not recommended for suspension, has now been listed for closure.
All tonnages listed above are for 2015 output, the last full
year of production before the disruption of the audit.
The likely impacts of these closures are shown in the graph
below showing the impacts of mines closures on total mined nickel output and
Philippine DSO output. We assume that the mines listed for closure and
suspension remain mothballed in the near term (at least until 2019). The impact
on DSO shipments to China will be more significant than the total drop in mined
output, as two of the largest mines not affected by the audit, Nickel Asia
Corporation’s Rio Tuba and Taganito, process most their ore domestically at the
Coral Bay and Taganito HPAL plants. While total mined nickel output is
estimated to drop by 240kt from 372kt in 2015 to 131kt in 2017, a fall of 65%,
mined nickel available for export will fall from 313kt to 70kt – a total loss
of 242kt (down 78%) from the DSO market, which would equate to around 220kt of
lost nickel in NPI production in China.
One surprising factor in recent developments has been the new
Philippines administration’s commitment to enforce the closure of operations
which did not pass the audit, rather than implementing temporary suspensions.
In the period from the announcement of the audit through its initial findings
late last year, it appeared many sites recommended for suspension were allowed
to continue operating up until the arrival of the rainy season. AME previously
expected that many suspensions would be implemented after the arrival of the
rainy season, when DSO operations usually cease anyway, allowing mines to
rectify their outstanding compliance issues in time for the restart of shipping
around March, with only limited impact on 2017 production. However, the
decision to close many operations, despite reported expectation from some Mines
and Geosciences Bureau officials who recommended suspension until outstanding
issues were rectified, points to a much stronger political will to see mining
Uncertainty surrounds some of the operations listed for
closure, in particular Global Ferronickel Holding’s Cagdianao (PGMC) operation.
This was the largest DSO shipper in 2015, and was not listed for suspension or
recommended for suspension following the delivery of initial audit results late
last year. The company plans to mount a legal challenge to their closure order,
and believes their operations will continue through 2017, announcing in recent
weeks two 1Mwmt offtake agreements with Tsingshan and Baosteel for 2017, which
brings their contracted sales to 4Mwmt for 2017, with a total output of 6Mwmt
planned by the company. If the Cagdianao (PGMC) mine continues operations, AME
expects it would add around 50kt to Philippine DSO supply in 2017, lifting the
country’s DSO output to 120kt of nickel contained in laterite ore. Legal
challenges by Global Ferronickel Holdings and other producers may see many of
the closures overturned, if it is found that due process has not been afforded,
or that mining rights awarded to producers before later environmental
legislation has precedence.
As the political will in the Philippines appeared to be
strengthening, the Indonesian government appeared to have lost its nerve and
flip flopped on their 2014 ore export ban, announcing that limited exports
would be allowed, and infuriating investors who had poured billions into new
NPI smelters in Indonesia.
- The Indonesian government announced in January, that the ore export ban would be partially lifted, allowing export of DSO ore of less than 1.7% nickel grade by processors with excess ore who have met a minimum 30% utilisation threshold in their processing plants. The exact meaning and implications of this are difficult to pin down.
- This move appears sure to damage Indonesia’s reputation for providing a stable policy environment for foreign investors. In the lead-up to the 2014 export ban, and since then, there has been very significant investment in Indonesia in new NPI plants estimated at up to US$15bn, dominated by the Chinese investors. For example, the great success story arising from the ashes of the export ban was Tsingshan’s mammoth SMI smelter in Sulawesi, which has now reached a production capacity of 120ktpa, with an integrated stainless steel back-end, following an investment exceeding US$2bn. Relaxation of the ban to allow exports of Indonesian low-grade (<1.7%) ore, which is still high-grade compared to most Philippine production, threatens to depress the nickel price and erode the economics of the new Indonesian smelter investments, as idled Chinese NPI capacity could re-enter the market. Many investors are considering legal action.
But how much nickel will Indonesia let loose in the export
market is still unclear. Last October an Indonesian official was quoted saying
Indonesia could export up to 15Mt if the ban was reversed. Others have
speculated that exports would be closer to 5Mt, which is a similar level to the
5.2Mtpa PT Antam reportedly is ready to export. This would place Antam, a 65%
government owned company, as the primary beneficiary of the ban reversal from
the nickel perspective. Despite having its own smelting operation at Pomalaa,
since 2014 Antam has struggled to raise funds for its new smelter project in
East Halmahera, as it had been the country’s largest DSO exporter and a
significant portion of its cashflow was eliminated by the ban. Should Indonesia
allow 5Mwmt of exports, AME estimates just under 60kt of mined nickel will
enter the market, equivalent to 55kt of finished nickel in NPI. At 15Mwmt, this
The net impact of Philippine closures removing 190-240kt, and
the conditional reversal of Indonesia’s export ban adding somewhere between
56-168kt to the market would be a removal of 184kt if only 5Mt is exported by
Indonesia and all Philippines operations listed for closure and suspension
remain shuttered. If Indonesian exports lift to 15Mt, and Global Ferronickel
Holdings remains in operation, the DSO market would tighten by just 22kt.
This sounds like good news for the nickel price. Just curb
your enthusiasm with the thought that at the start of this year, by AME’s
estimates, Chinese producers were still sitting on over 120kt of nickel in ore
sitting at the ports.