Unprecedented levels of Chinese demand for nickel ore has created a sizeable market opening for the Philippines to expand nickel exports, prompting the country to re-examine the underdeveloped minerals industry and maximise output amid a dearth of supplies in the region.
An unexpected ore export ban introduced by one of the largest producers, Indonesia, in January has allowed the Philippines to become a top supplier of nickel ore to China, which uses it to make nickel pig iron, a key ingredient in stainless steel. The ban comes at a time when the government is investigating ways to boost the economic contribution of the mining sector, which accounts for less than 1% of GDP, in spite of vast, largely untapped mineral resources.
The Philippines, which was ranked by the US Geological Survey as the world's biggest producer of nickel alongside Indonesia in 2013, is rapidly expanding output to meet demand from China. Nickel miner Marcventures Holdings announced in October that it had received government approval to expand its mining operations, with the Mines and Geosciences Bureau (MGB) granting it permission to extract from a 4,799 ha site in Mindanao’s Surigao del Sur province.
The company will move beyond its existing 300-ha site, enabling it to ramp up ore exports to China. The area holds an estimated 57m wet metric tonnes (WMT) of nickel ore reserves, which are expected to last until 2019. However, financial services group Maybank ATR Kim Eng said that this period is likely to be extended with further exploration.
“Marcventures, one of the top five nickel miners in the Philippines, is benefiting from the Indonesian ore ban as it exports all production to China,” said Maybank’s Ramon Adviento in a note to clients. “The supply deficit in nickel is expected to last until at least 2018, and longer if stainless steel demand continues to grow, even at a slower pace than the current 7%. Consequently, prices are likely to remain high”.
The Philippines’ nickel exports to China, the world's biggest buyer, jumped by 26% between January and August, according to Reuters. Expectations that China's stainless steel mills would run out of ore after Indonesia's ban helped benchmark nickel prices surge more than 50% by May. They have since cut gains to around 20% for the year, standing at around $16,550 a tonne.
Marcventures expects Chinese exports to reach 3m WMT this year, up from 2.8m WMT in 2013, and more than quadruple the 620,000 WMT exported in 2011, when its mining operations first began. Nickel Asia, the country’s largest nickel producer, expects to ship 17m WMT in 2014, a 21% increase over 2013, reporting in October that its four operating mines sold a total of 14.3m WMT between January and September, a 38% increase over the same period last year.
Strong nickel growth in 2014
Nickel dominates the mining sector, with the number of nickel mines jumping from 15 in 2010, to 27 in 2014. The MGB reported that the country produced P99.3bn ($2.2bn) worth of precious and base metals in 2013, including nearly P30bn ($667.2m) of nickel ore.
However, in spite of its vast mineral reserves − estimated at $850bn, including the third-largest gold reserves in the world, fourth-largest copper reserves and fifth-largest nickel reserves, according to the Philippines Department of Environment and Natural Resources (DENR) − the sector’s economic input is low. Contributions to total exports have stood at single digits until recently, according to the MGB with the export of minerals and mineral products averaging 3.94% from 2003-2012.
The sector’s contribution is likely to rise this year. Total exports of minerals and related products rose by 46.2% between 2012 and 2013 to reach P3.42bn ($76.1m) in 2013. By the second quarter of this year, total mineral exports had reached a value of P2.09bn ($46.5m), according to the MGB, nearly matching 2012’s entire export total. This compares with total exports of $29.8bn in the same period.
Investments in the mining sector have been hindered by lengthy approval processes for exploration permits with foreign investment obstructed by the requirement of 60% domestic equity control. A dearth of processing plants of materials in the country has also slowed growth and made a minimal contribution to employment.
New legislation on exports
In a bid to tap into the estimated 9m ha of mineral resources, the government has been examining strategies to raise the sector’s overall economic contribution, such as seeking a bigger share of mining revenues and a move similar to Indonesia’s ban of exports of unprocessed ore. Value addition would improve industrialisation, attract investment and help grow revenues it said.
In September 2014, the government announced that new legislation, which would halt exports of unprocessed mineral ores, had been approved at the committee stage in the country’s lower chamber of Congress, after Congressman Erlpe John Amante introduced the bill in July.
Officials estimate that revenues could triple from mineral exports if the bill becomes law. Environment and Natural Resources Secretary Ramon Raje said the government would support the bills, provided they include a support system for establishing new processing plants. At present, only two nickel processing facilities, one copper smelter, and two gold processing facilities, are in operation, prompting concerns from producers over the time needed to secure power supplies, a necessary step before they can build domestic processing facilities.
Analysts remain sceptical about the likelihood of the legislative changes being implemented, given the time it takes for a bill to pass into law and the impact of elections in 2016.
The proposed legislation also comes at a time of uncertainty for the industry as the government aims for new tax legislation to boost its share of mining revenues. Officials expect annual returns from mining to double to as much as $1bn under a revenue-sharing scheme that will see the government taking 55% of the industry's net revenues or 10% of gross revenue, whichever is higher.