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By Bloomberg

The Philippine government should move toward banning mineral ore exports, the environment secretary said today, offering support to a bill proposing restrictions that may threaten nickel ore supplies to China.

The proposal last month by Senator Paolo Benigno Aquino would require all minerals to be processed before export. The move follows a similar ban by Indonesia, the world's largest producer of nickel, that went into effect in January and helped push up prices of the refined metal 37 percent this year. The Philippines has replaced Indonesia as the largest supplier of nickel ore to China, the world's biggest user.

"The government should really move toward that direction," Environment Secretary Ramon Paje said in a phone interview from Manila. "It's disadvantageous to be continually shipping raw ore. We're not saying let's ban it now. There's enough time to discuss the proposal, improve government support and provide incentives to make the industry more competitive."

Nickel on the London Metal Exchange rose 2 percent to $19,454 per metric ton at 4:34 p.m. Hong Kong time today after surging 2.8 percent yesterday following news of the proposal.

Paje's comments that the nation should focus on boosting the downstream mineral sector were echoed today by the bill's sponsor, Senator Aquino, and Leo Jasareno, director of the country's Mines and Geosciences Bureau.

'Long Process'

"This will be quite a long process and it's good to start discussions now on how to create more value for the mineral sector," Senator Aquino, cousin of President Benigno Aquino and a member of the ruling Liberal Party, said in a phone interview. "The mining industry can be one of those sectors that can fulfill our target in terms of bringing in more foreign direct investments."

For policy makers in Manila "the real issue is not the ban, but to establish a downstream processing industry," Jasareno said.

A ban on mineral exports would be "the first shot across the bow" before the government raises mineral-export taxes, Ian Roper, a Singapore-based analyst at CLSA Ltd., said by phone.

"Capture more rent from it, raise more export tax, get more money for the government, but don't ban it," Roper said. "If it happened, it would be very, very serious and China would have very few sources."

Cut Off

The Philippines overtook Indonesia as China's largest supplier this year, according to Chinese customs data. Imports of Philippine nickel ore more than tripled since December to 5 million tons in July, accounting for nearly all of the country's overseas supplies.

"If the Philippines did implement a ban along the same lines as Indonesia, virtually all nickel ore flow would be cut off and there would be very little raw material available to produce nickel pig iron in China," Ivan Szpakowski, a Hong Kong-based commodity analyst at Citigroup Inc., said by phone. NPI is a low-quality alternative for refined nickel in the production of stainless steel. A ban would provide further support for Citigroup's 2015 price forecast of $24,000 a ton, the bank said in a report yesterday.

Any bill would face delays in both passage and implementation. Indonesia's restrictions were approved in 2009 and didn't go into effect until this year.

Finance Secretary Cesar Purisima in August urged lawmakers to prioritize passage of a bill that will boost revenue from the industry, two years after President Aquino signed an order seeking a higher share for the government in resource contracts.

'Baffling'

"It's baffling how one can seek a ban on exports of mineral ore," said Nelia Halcon, the executive vice president of the Chambers of Mines of the Philippines. "This needs to be studied well and planned depending on the country's development plan. I think this will take time. The downside will be additional uncertainties in business that will decrease investment all the more."

It will be difficult to get the bill passed because a number of lawmakers have interests in nickel mining, Earl Parreno, a political analyst based in Manila, said by phone. "Nickel companies are not yet prepared to invest in processing plants because they could lose significant revenue."

Shares of Nickel Asia Corp., which has an ore processing plant in the Philippines, rose 6.2 percent today to a record 44.40 pesos per share. Marcventures Holdings Inc. fell 1.1 percent to 6.62 pesos and NiHAO Mineral Resources International Inc. fell 0.5 percent to 2.22 pesos.

"In the short term, a ban is going to be bad for the industry as only Nickel Asia has processing plants while others like Marcventures and NiHAO just ship ores," said Katrina Tecson, an analyst at Manila-based RCBC Securities Inc. "In the long term, this will be positive as the industry's output will be sold at higher prices."