08/05/2014 - 10:37

Nickel win may be short lived

08/05/2014 - 10:37

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Just as Western Australia’s nickel miners pop champagne corks to celebrate the remarkable 40 per cent rise in the nickel price over the past five months, signs have started to emerge that the party might soon be over

Nickel win may be short lived
Nickel mining at Panoramic Resources.

Just as Western Australia’s nickel miners pop champagne corks to celebrate the remarkable 40 per cent rise in the nickel price over the past five months, signs have started to emerge that the party might soon be over.

The reason for concern is the same factor that caused the celebration – Indonesian government policy on the export of unprocessed ore.

Officially, there has been no change in a ruling that bans the export of material assaying as low as 1 per cent nickel (little more than dirt), a policy that has helped drive the nickel price up from $US6 a pound before Christmas to overnight trades at $US8.45/lb.

Unofficially the pips are squeaking in Indonesia, with widespread job losses in mining provinces that once benefited from the ore-export business bringing the first signs of social unrest, backed by a warning from the World Bank that the ban might be doing more harm than good.

By shutting down its unprocessed ore business, Indonesia has removed a major competitor for Australian nickel and other minerals, including bauxite and alumina.

Politically popular, the ban is unlikely to be lifted before the July 14 Indonesian presidential election, but a closer look at the financial damage caused by the prohibition will be taken after the election.

First item under the microscope will be the $US6 billion hit to Indonesia’s trade balance, while even closer to home will be the $US2 billion removed annually from government tax revenues caused by an entire export industry grinding to a halt.

A recent World Bank report said the export ban had damaged the appeal of Indonesia as an investment destination, especially for mining, “which is already perceived as one of the weakest in the world”.

Before the end of 2014 it is highly likely that the Indonesian government will recognise that killing the export of nickel ore and bauxite has achieved nothing for the country except boost unemployment and damage government finances.

The prize promised by the government – a wholesale building boom of mineral processing facilities and refineries to treat ore locally and encourage a valued-added metal exporting business – is nowhere in sight, despite promises from industry that it would make the switch.

Some former ore exporters are trying to develop value-added refineries, but they’re struggling to raise the capital locally or in international markets thanks to Indonesia’s often-erratic policies governing mining.

Concern about corruption at private and government levels has raised the risk profile for foreign companies interested in doing business in Indonesia, which is one reason why major Western mining companies tend to avoid the country.

Corruption is one issue, while a far more potent factor is that the financial numbers simply don’t add up; or as a research analyst in the Hong Kong office of advisory firm Sanford C Bernstein told London’s Financial Times newspaper yesterday: “The world is already filled with refineries and smelters. By building a whole new production system in Indonesia, why is it going to be more competitive?”

In a nutshell, that’s the key question the Indonesian government will be forced to address after the July 14 election.

It has forced the closure of a valuable industry, much to the delight of competitors such as Australia, and is achieving nothing in return.

The counter argument from government spokesmen is that the ore ban was always going to cause short-term pain for long-term gain.

What will become soon become clear to Indonesia is that the long term could be very long term, perhaps never, because the country is drifting towards the status of a no-go region for international investors – the people needed to pay for the refineries and smelters the governments hopes will replace the unprocessed ore business.

For now, WA’s nickel miners are safe, basking in an artificially high nickel price that has done wonders for their share prices. Mincor Resources, for example, is up by 50 per cent since the start of the year. Panoramic Resources is up by 154 per cent, aided by discovery news.

The trend in the second half of the year might not be so positive if Indonesia bends to financial pressure and reinstates one of its most important industries.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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