The House of Representatives Committee on Appropriations approved on January 22, 2020 an unnumbered substitute bill seeking to establish a fiscal regime for the mining industry. The bill, which was approved by the HOR Committee on Ways and Means on November 19, 2020, requires, among others, a royalty payment of 3 percent of the total gross output and the establishment of a National Resource Trust Fund from an additional 2 percent levy on total gross output.
The bill, however, overlooks a very important mining policy issue: the establishment of nickel processing plants such as ferro-nickel smelters, leaching plants, converters and refineries.
In 2018, the Philippines produced 26 million metric tons of raw nickel ore and exported all of them to China. In contrast, Indonesia processed 27 million metric tons of raw nickel ore into ferro-nickel in 11 domestic smelters before exporting them to China. By 2022, Indonesia would have 29 nickel smelters processing 70 million metric tons of raw ore.
Ferro-nickel is priced at 90 percent of the official price of the London Metal Exchange while raw nickel ore is generally priced at only 10 percent (or even lower, depending on the grade) of the official LME nickel price. Ferro-nickel, which enjoys a price advantage of nine times the price of raw nickel, is obviously the way forward for our country, not the export of raw nickel ore.
If a law can be passed requiring the domestic processing of nickel and banning the export of nickel ore, the Philippines can be a developed country in 10 years or less. Nickel can do for the Philippines what petroleum did for the Oil Exporting Countries.
In the third quarter of 2018, nickel prices jumped by 27.8 percent due to the ban on raw nickel exports by Indonesia. This simply means that a law banning the export of nickel ore from the Philippines would further trigger higher nickel prices.
While the Philippines would be enjoying a comparative advantage in nickel processing, such an advantage can be wiped out by the so-called Dutch Disease, a problem common among natural resource-rich countries.
Beginning in 1959 after the discovery of a large natural gas deposit, the Dutch economy experienced a massive inflow of foreign exchange that caused its currency to appreciate significantly, adversely affecting its export-oriented industries. Dutch exports became more expensive and imports became cheaper, causing its manufacturing and agricultural sectors to lag behind. Moreover, mining, while being capital-intensive, is not labor-intensive, leading to higher unemployment rates.
Generally, the “Dutch Disease” can be handled adequately by managing the large foreign exchange inflows through large sovereign wealth funds such as those in Australia, Canada, Russia and Norway.
I hope that the bill can include, side by side with the establishment of the National Resource Trust Fund (or sovereign wealth find), a provision banning the export of raw nickel ore and requiring the establishment of nickel smelters in the Philippines. In so doing, Congress would have legislated the industrialization of the Philippines in just one law.