Crunch time is coming for the flow of nickel ore from the Philippines to China.
The market is awaiting news of how many more nickel mines might fall foul of a sweeping clamp down on what the Philippine administration terms irresponsible mining.
Eight nickel mines have already been suspended. Another 14 have been put on notice.
Between them they account for around half of the country's production, putting at risk China's nickel pig iron (NPI) producers who have become increasingly reliant on Philippine supply for their raw material input.
But the truth of the matter is that Philippine ore exports are going to slow dramatically over the coming months whatever the outcome of the current mine audit.
They always do at this time of year because of the rainy season.
This time around, however, normal seasonality could generate an abnormal supply-chain shock because of low inventory in China.
That's what nickel bulls will tell you anyway. Bears are unconvinced, arguing that China's NPI sector has proven itself resilient in the past to shifts in raw material flows, so why should this time be any different?
Uncertain as to which way to call the impact on nickel's complex supply landscape, the market is expressing itself less on outright price than on call options.
LOPEZ AND THE RAIN
The results of the latest audit on the mining sector are coming imminently, according to Regina Lopez, former environmental campaigner and now Philippine Environment and Natural Resources Secretary.
And "there will definitely be suspensions", she told Reuters at the start of this month.
How many and for how long she wouldn't say. Nor whether any of those mines already suspended might be allowed to restart.
In the short term it doesn't matter much. The rainy season is a more reliable predictor of the country's nickel ore exports than government policy.
And exports to China are already showing signs of slowing as they always do around this time of year.
It's just they are falling from a lower base, since they were already running 12 percent below year-earlier levels in the first 10 months of 2016.
And they will fall harder this year due to the near depletion of Altawitawi Nickel Corp's Tumbagaan mine, one of the few that could operate during the rainy season, according to analysts at Macquarie Bank.
STRESS-TESTING THE SUPPLY CHAIN
The question facing the nickel market is not whether the flow of nickel ore to China's NPI sector is going to slow.
It's rather how resilient will be the supply chain to the slowdown.
China's stocks of nickel ore are currently estimated by Mysteel at 13.4 million tonnes MYSTL-INKO-TTPR. It's uncertain just how much that represents in terms of contained nickel.
But the key takeaway is that they have been falling sharply over the last couple of months and are close to the 12.7-million trough recorded in April at the end of the last Philippine rainy season.
Macquarie, which is firmly in the bull camp, argues that the normal seasonal drawdown would mean contained nickel in ore inventory falling below 30,000 tonnes by March, "the lowest in recent history and equating to less than one month consumption". (Commodities Comment, Nov. 28, 2016).
That would imply a major supply and price hit to China's nickel-stainless steel supply chain.
Unless, of course, China can find alternative sources of nickel feed. Which it might be able to do, according to the bear argument articulated by Citi analysts. (Metals Weekly, Dec. 6, 2016).
Ironically, the gap could be filled by Indonesia. "Ironically" because it was that country's own 2014 suspension of nickel ore exports to China that created the new dependency on Philippine ore in the first place.
Indonesia shut off all exports of unprocessed minerals to force its mining sector down the value-add beneficiation road.
That policy is now starting to bear fruit with Chinese players, led by Tsingshan Group, off-shoring both NPI and stainless steel capacity in Indonesia.
There is now a large and rapidly growing flow of NPI from Indonesia to China, almost 600,000 tonnes of it in the first 10 months of this year, already three times last year's total.
Will it be enough to offset the drop in Philippines ore shipments over the coming rainy season? Particularly if seasonality is overlaid with more mine closures?
There are too many moving parts to this nickel supply conundrum to say with any certainty.
UNCERTAIN CALL AND CALL OPTIONS
Which is probably the reason why interest in the London nickel options market has cranked up several gears over recent weeks.
Faced with a difficult call as to what exactly will happen to the nickel supply chain, bulls have been expressing themselves via call options.
Activity in London Metal Exchange (LME) nickel options totalled almost 195,000 lots in October and November, up from 110,000 lots in the previous two months.
Outstanding open interest in call options, which confer the right to buy, totals 14,406 lots across the first quarter of 2017. That dwarfs the 6,545 lots of open interest on put options, which confer the right to sell.
There are noteworthy clusters of open interest on the $12,000 strike price (3,948 lots), the $12,500 strike (1,043 lots), the $13,000 (2,575 lots) and, on March alone, on the $13,200 strike (1,000 lots).
As of Thursday's close January was valued at $11,075, February at $11,091.50 and March at $11,108 per tonne.
The first-quarter 2017 time frame, of course, coincides with the seasonal drop-off in Philippine ore exports and the period of maximum stress in China's long nickel supply chain which ends up feeding its giant stainless steel sector.
That call option open interest is a heat map of bullish bets that the supply chain is not going to withstand the coming test without a price reaction.
Whether those expectations are right we're about to find out, but it's the Philippine rain as much as the new Philippine administration that's going to exert the biggest influence on actual exports over the next few months.http://www.reuters.com/article/philippines-nickel-ahome-idUSL5N1E43PK