The Philippines Department of Environment and Natural Resources confirmed yesterday that it was suspending 30 of the country’s 41 mines.
Many of the suspended mines are in nickel, and the DENR confirmed that around 55% of its annual nickel supply would be shuttered.
“The Philippines produces around 20% of total global mined nickel, so this would shut 11% of world supply,” UBS said.
UBS said the suspensions appeared larger than the market expected.
“In addition, the impact will be felt more acutely by China’s NPI industry as a big proportion of unsuspended production is contracted to Philippine and Japanese HPAL smelters,” UBS said.
UBS said the impact of the suspension widened its 2017 estimated nickel deficit to 225,000 tonnes from 125,000t – which was significant in a global market of around 2 million tonnes per annum.
“But there exist sizeable buffers in trade short-term. There is 474,000t of nickel metal on the LME/SHFE (minus 30,000t in the past 6 months)," analysts said.
“There is also around 150,000t of nickel contained within ore stockpiles in China (roughly six months feed).
“So nickel market physical tightness is not likely until early 2017 in our view when China’s stainless producers will need to buy much more nickel metal.”
UBS suggested speculators could add positions in the short-term which may lift the price before the physical tightness sets in.
“Also supportive could be downstream restocking as stainless customers effectively pay for nickel on a one-month lag,” it said.
Nickel rose by around 1% to $US10,585 per tonne overnight, or roughly $4.80 per pound, but is still below its 2016 high of $10,815/t reached in August.
The price is up by around 25% this year, and UBS is tipping an average price of $5/lb this year (up from the year-to-date average of $4.17/lb).
It is expected to average $6/lb next year.
“But past nickel rallies have happened quickly and with greater magnitude than our base case,” UBS noted.
UBS’ top nickel picks are Russian giant Norilsk, and Independence Group given that Nova is close to production.
“We believe Western Areas and Vale Indonesia have most earnings leverage,” it said.
After jumping by more than 10% yesterday afternoon, Western Areas shares were down by 5% to $A3. IGO was down by 1.6% to $4.18.
