Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics

Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics

Following a stunning 12.35% surge, the 6-company Philippine mining index was this week’s best performing sector.

Nickel Asia’s thundering 57.7% returns combined with Global Ferro Nickel’s sizzling 10.9% gain contributed most to the sector’s advance. On the other hand, other sector components had mixed results: Semirara up .65%, Apex Mining down .81%, Century Peak Metals increased .4%, Philex Mining 3.66% while PXP Energy plummeted 9.83%.

The Indonesian government’s declaration of a nickel ore export ban from January 1, 2020, stoked speculations that such actions would benefit local nickel mines.

This article from the PNA rationalizes by reasoning from price changes booming price shares of domestic nickel mines: “The Philippines’ decision to implement stricter environmental policies and regulations is projected to hamper the nickel mining sector’s growth, but Fitch Solutions Macro Research believes the sector can get a relief from Indonesia’s nickel ore export ban”.

To be clear, I am positive on the long term prospects of nickel mines, but current developments reveal the penchant of domestic markets to exaggerate pricing.

According to Investing.com, the Philippines is the second major world producer of nickel after Indonesia. New Caledonia (France), Russia, Australia, and Canada ranked third, fourth, fifth and sixth, respectively.

According to the Nickel Institute, the primary use of Nickel is as stainless steel 70%, as Non–Ferrous alloys 9%, as alloy steel and castings 9%, as plating 8%, batteries 3% and on other uses 1%.

Engineering has the largest 37% share of Nickel use per industry. Metal goods ranked second with 20% share, building and construction 15%, transport 14%, electronics 11%, and others 4%.

Global prices of Nickel (in USD) has been rocketing since it bottomed in 2016 on the back of plunging inventories (KITCO). As of last Friday (September 6th), USD prices of Nickel (KITCO) have raced to a 66.41% return for the year as Indonesia’s export ban should add to the reduction of global nickel supplies.

Supply of Nickel has been instrumental in shaping the industrial metal’s global market prices since the 1980s (ChartrUS).

There has been so much hype surrounding the Nickel’s role in the battery of Electric Vehicles (EV). Sad to say that even prices of lithium, a light metal widely used for the manufacture of batteries, have been in a waterfall since Q3 2018, almost in conjunction with the decline of the Global PMI. Notably, a slowing global economy has also been hampering the sales of global Plug-in Electric Vehicles. Not to mention that only 3% of nickel usage goes to battery manufacturing.

Even in the context of stainless steel, which accounts for Nickel’s largest usage, has barely been vibrant. Global prices of stainless steel have barely budged since it found a trough in 2017 (AGMETALMINER).

Rather than demand, supply constraints, mainly from domestic or even local policies, have played the primary role in contributing to the dwindling global supply of nickel, and consequently, the metal’s price dynamics. For instance, 2019's export ban marks the second imposed by the Indonesian government. In 2014, the same government imposed an export ban that it lifted in 2017.

How has the nickel price boom affected the performance of domestic mines?

USD prices of Nickel zoomed by 19.05% in the 1H of 2019. Since the peso was up 2.6% during the same peso, nickel’s net gain in peso was about 21.65%.

Nickel Asia’s sales grew 4.41% in the 2Q and contracted by .36% in the 1H of 2019. The profit margin for ore sales has been shrinking. It was 49.38% in the 1H of 2019, compared to 53.01% in 2018 and 58.81% in 2017. In short, surging global prices of Nickel barely distilled into the company’s sales and or margins.

If surging global prices of nickel failed to percolate into NIKL’s fundamentals that had not been true for Global Ferro Nickel (FNI).

FNI’s sales zoomed 19.63% in 2Q and 24.06% in the 1H.

FNI’s profit margins widened as well. In the 1H 2019, FNI’s margins expanded to 46.9% from 45.8% in 2018.

Yet, FNI’s share prices had been bid lower than of NIKL.

Perhaps, aside from the national level, the local political environment had influences on operations of Philippine Nickel mines, which are estimated to be in the 30s.

And unless the national government gives sufficient breathing regulatory and tax space to these mines, only a speck of soaring global nickel prices will filter into earnings and profits of listed mining firms.

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