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World nickel faces supply shock as UBS flags risk in 2017

Monday, October 3, 2016 - 11:30

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About a tenth of the world's nickel supply is at risk after the Philippines widened its crackdown on miners, raising the chances of prices rallying by another 25 per cent through 2017, according to UBS Group AG, which had already billed the metal as one of its favored commodities.

[SHANGHAI] About a tenth of the world's nickel supply is at risk after the Philippines widened its crackdown on miners, raising the chances of prices rallying by another 25 per cent through 2017, according to UBS Group AG, which had already billed the metal as one of its favored commodities.

The nickel market is reeling after the Philippine government threatened to close another 14 mines last week, pending responses to an environmental audit. Of the 41 operations that were reviewed - the majority of them nickel producing - about three-quarters have either been halted or told they need to come up to scratch.

That puts 55 per cent of Philippine nickel output, or 11 per cent of global supply, at risk of exiting the market, according to UBS. Shutdowns raise the chances of nickel reaching US$6 a pound, or US$13,228 a metric ton, by the end of next year, analyst Daniel Morgan said by phone from Sydney on Friday.

"A supply cut of about 10 per cent is a big cut in any commodity market," he said. "In the short term there is enough metal out there as a buffer for the next few months, so are the stainless steel customers anxious? I would say not yet, but they will be in 2017. Our base case is heading towards US$6 by the end of 2017 but there is every potential that a rally could go further."

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Nickel is 19 per cent higher this year at US$10,520 a ton, with the bulk of the gains coming since June, when incoming Philippine President Rodrigo Duterte and his pick as environment secretary, Gina Lopez, vowed to crack down on a mining industry they say is despoiling the land and threatening the livelihoods of the poor.

UBS named nickel as one of its most-preferred commodities in August, before the extent of the Philippine crackdown had become apparent. The South-east Asian nation supplies nearly all of the ore used in China's stainless steel industry, and Citigroup Inc has also warned that the "unexpectedly stringent" audit could materially tighten supplies.

"Stainless steel output, globally, was flat for two years, and that's a horrible thing for any commodity to experience," said Mr Morgan. "However, from the second quarter this year, China's stainless output has been quite strong, and they are going to be looking for much more nickel in early 2017."

UBS's forecast for next year is for nickel to average US$5 per pound, or US$11,023 a ton, above the median consensus from 18 analysts of US$10,920 a ton. Still, the metal has defied previous predictions of big rallies following Indonesia's halt to ore exports at the start of 2014.

Last year, it missed estimates by more than any other base metal as demand slumped and stockpiles stayed stubbornly high.

The Philippines is expected to give a final verdict this month on the latest mines recommended for suspension. The country has done "irreparable damage" to its reputation among foreign investors, according to Mick Wilkes, chief executive officer of Melbourne-based OceanaGold Corp, which mines copper and gold and operates a project facing the ax.

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