News that the Philippines was preparing to follow Indonesia in banning exports of unprocessed minerals caused panic in the London nickel market last week.

The Philippines has emerged as the main supplier of nickel ore to China's massive nickel pig iron (NPI) sector after the cessation of exports from Indonesia. The threat that this flow too would be cut off appeared to represent a dramatic acceleration of an already bullish story.

Until it emerged on Tuesday that any Philippines ban is several years away.

On the London Metal Exchange (LME) benchmark three-month nickel collapsed by $1,000 per tonne to $18,925 on Tuesday, wiping out the gains notched up over the previous days.

However, the market might be overly complacent about the apparently extended time-line before any Philippines ore ban, if it's collectively assuming that events in that country will mirror those in Indonesia.

What is less in doubt is what the recent price roller coaster says about the bullish mindset in this market, particularly its responsiveness to supply-side news.

PHILIPPINE ORE

Ever since January, when Indonesia introduced a complete ban on exports of ore, nickel has outperformed all the other base metals traded on the LME. Understandably so, since at the stroke of a presidential pen, Indonesia has cut off around a third of global nickel mine supply.

At risk are China's many NPI producers, who have emerged as a major source of nickel supply for the country's stainless steel sector, but with a critical dependency on Indonesian ore as their primary source of raw materials.

The bull impetus had, until last week, been stalled by the apparently inexorable rise in LME inventory, a sign that the world is not yet short of nickel.

But from the bulls' perspective, it is just a matter of waiting until what is viewed as the inevitable reduction in NPI production feeds through into the global refined nickel market.

The time-line is inexact and problematic, though, since it hinges on several moving parts.

How long will it take NPI operators to run down the stocks of ore accumulated ahead of the January ban? How successful might they be in finding replacement sources of feed? And how fast can they build NPI plants in Indonesia as required by a government aiming to force its mining sector down the value-added path?

The Philippines holds the answer to two of those questions. It has traditionally been the second-most important source of nickel ore for Chinese NPI producers, although the ore tends to be lower quality than that from Indonesia.

It is now the only source of ore and shipments have boomed in response to China's appetite for replacement feed. China's imports from the Philippines were a record 5.0 million tonnes in July with cumulative imports up 15 percent so far this year.

The consensus view is that ore from the Philippines will not fully replace that lost from Indonesia but increased shipments might well extend NPI operators' life-line, particularly if they are blending it into their existing stocks.

Which explains why the nickel price shot up when the news broke that Philippines lawmakers were contemplating legislation identical to that which cut off Indonesian nickel ore flows.

The bull froth quickly evaporated, however, when it became clear that it will probably take around two years to formulate and pass the legislation and a further five years before any ban is implemented.

PANIC OVER?

That five-year grace period mirrors the Indonesian legislation, which passed into law in 2009 but was only implemented this year.

The market has concluded that a Philippines ban in seven years' time is far too distant an event to force a recalculation of the current nickel supply time-line. But that assumes that the legal process in the Philippines will also mirror that in Indonesia.

It's worth remembering that until the very last days of 2013 just about no-one thought the Indonesian ban would happen. The mining sector was lobbying intensively to stop it or at least water it down and the fractious nature of Indonesian policy-making suggested that the most likely outcome would be some sort of half-way compromise.

Not so. The Indonesian government has not blinked and even the country's big copper miners, Freeport McMoRan and Newmont Mining, have had to negotiate amended contracts to factor in steep escalations in export taxes and an eventual ban on exports of copper concentrates.

There is no reason to assume any similar last-minute drama in the Philippines. The government there will be playing catch-up with Indonesia, which should already have several operating NPI plants by the time any legislation is enacted.

There is the potential, in other words, for the Philippines to take an accelerated approach to any future ban, for example preemptively linking the granting of new nickel mining licences to commitments to build processing plants.

The devil will, of course, be in the detail but assuming the detail will be identical to that in the Indonesian case may be a risky assumption.

The Philippines will, unlike Indonesia, have a working template against which to fine-tune policy.

BULLISH FIRES

What's not in doubt is the latent bull spirits in the nickel market that were reignited on the Philippines news.

Rising LME inventory may have damped the early-year charge but the bulls, it is clear, are still there ready and waiting to jump on any supply-side news.

The LME's Commitments of Traders report showed money managers trimming existing short nickel positions and adding long positions in the second half of last week. The net long position increased by over 5,000 lots to 38,400 tonnes, representing 15 percent of open interest, a level eclipsed only in the zinc market. - Reuters