Investment News Analysis

Minefield for investors

At a stroke the Philippines has lost its number-one ranking as the world’s largest nickel producer – a position it’s held for the past five years. It now looks destined for fifth place, and maybe lower. This follows an order by Regina Lopez (pictured above), Secretary of the Department of Environment and Natural Resources (DENR) to close down 23 of 41 mines – mostly nickel – and suspend operations at five others, including the country’s largest gold mine.

In 2016, global nickel production looked like this. Philippines, 500,000 metric tons; Russia, 256,000 MT; Canada, 255,000 MT; Australia, 206,000 MT; New Caledonia, 205,000 MT; Indonesia, 168,500 MT (down from 400,000 MT in 2013); Brazil, 142,000 MT; China, 90,000 MT. We estimate that the fall in Philippine nickel output after the pit closures take effect will place the Philippines just ahead of Indonesia in the rankings – that’s unless Indonesia decides to seize the moment and ramp up its own ore production. And that’s very likely; last moth it announced that it’s lifting its three-year ban on nickel-ore exports.

Exports aside though, this could end up being one of the most costly pieces of ‘green policy’ ever attempted as aftershocks threaten to reverberate across the entire Philippine economy. The fact is, the adverse impact from the signals Lopez has sent out cannot be confined to mining – it could directly hit a number of other sectors including construction and haulage. It also has the potential to weaken – yet again – the Philippines’ ability to attract much-needed foreign direct investment (FDI). In a word, what Lopez is advocating is madness. And we wouldn’t be doing our job if we didn’t point that out.

The pit closures are the result of a nationwide audit of mines which were started last summer by the DENR’s Mines and Geosciences Bureau and personally led by Lopez, a strident environmentalist hardliner and a vocal critic of the mining industry. Where the axe fell also seems to have been her exclusive decision. “I visited the mines and I made my own judgment based on my own observations,” she said.

While we’re fully behind the greater part of the administration’s economic policies – in most cases geared to reverse the lacklustre performances of the past – we cannot support the DENR decision to decimate the mining industry. The job of this department is to manage natural resources, not to keep them buried in the soil and deny the benefits of them to the Filipino people.

The Philippines is sitting on massive God-given wealth – huge resources in metals and minerals – and to leave it in the ground borders on sin. This is like the third servant in the Parable of the Talents – those resources are the people’s resources. And they need them. Certainly, this sector’s been mismanaged for generations, but scrapping it completely is no answer and the ramifications from this could cost the Philippines dearly.

The fact is the imposition of a 50% mining ban is likely to have a grave impact on the wider economy. The message it sends to overseas investors – whom Mz Lopez seems to sneer at – is likely to be very extremely damaging. Inward investment is one lane of a two-way street; it’s not – anywhere in the world – designed to be charity. And yet, Mz Lopez evidently believes that investment should be driven solely by altruism. Here’s what she said:

“We want investors here who care about us, not about the money they make”. Well, investors, by definition, do care about the money they make and they also have to care about their shareholders otherwise they wouldn’t have any money to invest. That’s the whole point of investment. That’s how it works. So what kind of a message is that from a country desperate to increase its share of FDI? ‘Send your money but don’t expect any returns’? That’s outrageous, and it needs to be corrected very quickly.

And what’s next, tourism? Will just eco-tourism be acceptable? Agriculture – just the organic variety in future? Energy: will there be a moratorium on that? Coal-fired power generation: what happens there? Can any government policy now be switched on the whim of an individual? And what about the rule of law? Is Lopez’s decision compliant with the letter and the spirit of the Philippine Mining Act? These are the sort of concerns which investors will now have following Lopez’s unilateral declaration.

Like Lopez, we deplore the wanton damage caused to the environment by irresponsible mining and companies that operate that way should be heavily fined and their mining licences should be revoked. No question about it. That doesn’t mean that investment and caring for the environment are mutually exclusive; they’re not. That’s why the industry requires regulating and that’s the duty of the DENR. Its job is to make those resources work for the country while at the same time protecting the environment. It’s all in the title.

But, apart from having the potential of threatening inward flows of cash across a number of other sectors – energy springs to mind – what are the likely immediate economic impacts from the Lopez ban.

Credit Suisse, yesterday, estimated that real GDP growth could suffer a 0.2 percentage point drop while employment could fall by 0.3%. They point out that the unemployment rate currently stands at 5%. Elsewhere, the company’s note reckons that exports could suffer a 2% decline – which is all that troubled sector needs right now – putting stress on the current account for the rest of the year.

Furthermore, the rural communities Lopez claims to care for – and we believe she genuinely does – are likely to be hit worst. Job losses will impact these areas first, but local services will also be adversely affected. According to IMF data, the latest available, in 2011 the contribution to local government units (LGUs) from mining revenues added 3% to local government fiscal surpluses. LGUs are constantly crying out for more money to help them provide those services; few can afford to lose what’s already coming in.

As Credit Suisse warns:  “While the first-round economic impact to the Philippines from the mining ban may be manageable, we fear that these mine closures could send a negative message to foreign direct investors and manufacturers about the ease of doing business in the Philippines over the longer term”. (Bold type is their emphasis).

And that’s really a message Philippine business doesn’t need to be sending out to the wider world right now. This administration is making tremendous efforts to improve the ease of doing business – in fact it has done – and to promote FDI. Lopez’s proclamation could negate much of that.

Meanwhile in the immediate fallout, world nickel prices leapt. On the London Metal Exchange, nickel for three-month delivery rose by US$250 to US$10,500 a ton. Mining stocks listed on the Philippine Sock Exchange went the other way. On the news, shares of OceanaGold, the biggest gold miner in the Philippines, shot south by 15%; Global Ferronickle Holdings plunged by 11%, Marcventures Holdings lost 6% of its value. And as the dust starts to settle, the Chamber of Mines of the Philippines (COMP) and individual mining corporations are considering challenging the pit closures in court. COMP claims that the lives of more than 1.2 million Filipinos will be affected by the closure orders and US$22 billion worth of investments will be left in limbo. Lost output from the closed Philippine mines accounts for around 8% of world nickel supply.

The DENR is a cog in a wheel that should play its part in driving the economy forward. It’s not supposed to be a wheel in its own right setting off on an altogether different road in a direction that can compromise the economic effort and achievements as a whole. It can’t simply declare UDI. The DENR is not Mz Lopez’s private fiefdom even if she thinks it is.

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