Nickel Pig Iron

Good news for stainless consumers, the nickel price dropped to its lowest level in six years this week as the London Metal Exchange 3-month nickel price declined $390, or more than 3%, to $12,540 a metric ton according to the FT.

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After hitting a high in May of last year on expectations that Indonesia’s export ban would create a shortage, the market has declined as the deficit has failed to materialize. Indonesian supply was simply replaced by increased supply from the Philippines, up 23% in 2014 from a year before.

Stainless_Chart_March-2015_FNL

The Demand Erosion

At the same time, Chinese demand dropped from 909,000 metric tons in 2013 to 761,000 mt in 2014, despite a 9% increase in output of stainless steel. As a result, the FT quotes Natixis figures saying the market remained in surplus to the tune of 65 kilotons in 2014 a position that is unlikely to change this year. China’s nickel pig iron industry is being closed down in the face of tougher environmental standards. Reuters reports that only around 30% of the country’s capacity is currently operating, although with technological upgrades other producers will reopen given time.

Future Consumption

In the meantime, inventories appear adequate as both domestic end user demand appears weak and exports face growing anti-dumping barriers such as the EU’s recent 25% tariff.

A sustained recovery in the nickel price appears highly unlikely this year with no shortage of ore or refined metal available to both NPI plants and stainless steel mills.

Or that’s what Reuters’ analysis appears to be saying – and with good reason.

The nickel market enjoyed a bull run in the first quarter of this year following the Indonesian government’s hefty export tax on nickel ore exports resulting in a defacto ban. Overnight almost a third of global supply disappeared from the market and although Chinese Nickel Pig Iron (NPI) producers had been stockpiling supplies, nickel price rose as investors assumed the market would move rapidly into deficit.

FREE Download: The Monthly MMI® Report – covering the Stainless/Nickel markets.

To their consternation, and to most observers’ surprise, it has not. Indeed, China appears to be accessing adequate supplies from other sources to supplement its stocks of high-grade Indonesian material. While concentrate supplies from Brazil, Zimbabwe and Vietnam are said to have increased, it is the Philippines that has stepped in as the benefactor of Indonesia’s absence with shipments of their lower-grade material surging this year.

Nickel Ores

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You say potato, I say potatoh – such is the atmosphere lately surrounding the price outlook for nickel in 2014 and beyond.

MetalMiner has been covering the Indonesian mineral export ban up, down and sideways, especially how it will (or won’t) affect the nickel markets this year, and we’ve struck a tone that’s not as excited for the upside as some others are.

Front and center of the excited parties: Goldman Sachs. Case in point, Goldman has seen the upticks in the metal price lately and recently increased its 2014 nickel price forecast from $15,000 per ton to $16,000 per ton– a 10 percent increase – mainly citing the Indonesian ban’s potential to crimp supply.

Not only that, but Barclays Plc, Macquarie Group Ltd. and Citigroup Inc. all expect a market deficit, and the latter forecasts the price at $17,000 a ton this quarter, according to the Reuters rundown. (After rallying at the start of January, the current 3-month price of LME nickel is $14,625 per ton as of this writing.)

Whoa, Nelly! – The Ban May Not Last

According to a press release outlining Roskill’s 2014 nickel outlook, some wild card factors will come into play over the next several months, so the Goldman/Barclays/Macquarie bulls better hold their horses. (Couldn’t resist all those cliches!)

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Indonesian Exports Graph

Source: Reuters

Indonesia is the world’s biggest exporter of nickel ore, refined tin and thermal coal and home to the fifth-largest copper mine and top gold mine, in addition to being a major bauxite, zinc ore and iron ore supplier. We got into how the ban affects copper concentrates in Part One here.

The Indonesian authorities did not offer the same concession to the nickel and bauxite industries as they did to copper, although they did, temporarily, to zinc, lead and iron ore industries.

Indonesia accounts for about 15% of global nickel supplies. It is a major supplier to China where its high-grade laterite nickel, found only in tropical regions, is used to produce nickel pig iron, a cheaper alternative for making stainless steel than high-purity nickel.

FREE Download: The Monthly MMI® Report – covering the Stainless/Nickel markets.

Indonesia’s ore is the best grade for China’s rotary kiln NPI plants and is not easily replaced with supplies from elsewhere – which is why this is such a sticky wicket.

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800 pound gorilla

The nickel market is in oversupply, at least for the medium term. This is Glencore’s opinion, given as part of the firm’s recent Investor Day presentation.

Large-scale projects started in the last decade (in many cases, years late) coming to fruition will add an additional 250,000 tons of supply, even as a significant proportion of producers are losing money on their nickel production on a total cash basis.

From 2009 to 2013, global refined nickel supply growth is estimated as being 9.6% per year, reflecting a surge in nickel pig iron (NPI) output in China and new production from non-NPI producers. Even excluding NPI, nickel supply increased about 4.8% per year over the period. Inventory levels are as you would expect – high, both on and off exchange – and the price shows no sign of pickup anytime soon.

FREE Download: The Monthly MMI® Report – covering the Stainless/Nickel markets.

On the flip side, demand growth has remained robust, particularly in China where 80% of nickel is consumed in stainless production. Between 2009 and 2013 Glencore estimates global nickel demand grew at 8.9% per year, firmly driven by Chinese consumption, which increased by 18% per year. Excluding China, nickel demand increased by 3% per year, further skewing the market and prices towards Chinese demand as the main price driver.

The 800-pound gorilla in the nickel market, though, is not solely China’s dominance as the largest consumer…

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Nickel holds the dubious honor of being the worst-performing base metal in 2012 with a fall of 13% since January this year, coming on top of a 6% fall in 2012, according to Nickel Investing News.

Currently the metal price is around $15,200 per metric ton cash on the LME, while stocks have rocketed 56% from 90,500 tons in 2011 to 141,700 tons in 2012, and nearly 176,000 tons today.

All that in a market estimated by the World Bureau of Metal Statistics to be only 1.7 million tons annual consumption. And bear in mind we are only talking LME stocks here, trade inventory, financing deals and particularly speculative stocks held in China add significantly to the total.

It’s not that consumption has slumped: in fact, between 2011 and 2012 it rose, according to the WBMS, from 1.671 million metric tons to 1.755 million metric tons , a respectable 5% increase. The problem is supply has risen faster.

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We reported some months ago on Indonesia’s decision to ban the export of certain minerals and subsequently apply an export tax on raw ores in an attempt to maximise the return from the country’s natural resources.

Indonesia is acutely conscious that by exporting raw mineral ores it is leaving the value-add opportunity to its overseas customers in surrounding Asian markets, but particularly China.

As this graph from Reuters shows, although Indonesia is known as the world’s top exporter of tin, it is also a major supplier of many other minerals.

The country has only had two smelters of any significance, one for aluminum and one for copper, but as Reuters reports, the first of many refining operations has started up, taking nickel laterite ores and producing nickel pig iron.

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Continued from Part One.

In China, about 700,000 tons of capacity have been idled in recent months in the top-producing province, but the reality is this has been replaced by new, lower-cost capacity in western provinces — capacity is still growing at double-digit rates. A Reuters article notes that the aluminum market is expected to have a surplus this year of 445,000 tons, quoting a poll of 18 analysts questioned in April.

Janet Kong, managing director of research at China International Capital Corp. is quoted by Reuters as saying many high-cost smelters run by state-owned firms are reluctant to close down due to concerns about unemployment. Her estimate is 15,000 yuan per ton may be needed for deeper cutbacks. The domestic Chinese aluminum price is currently hovering around 16,030 yuan per ton, according to the MetalMiner IndX℠.

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At a recent presentation to a group of industry CEOs, my colleague Lisa Reisman was asked for her views on the nickel market. Coincidentally, this was a topic we had been discussing just the day before, and although we had written about it as recently as early December, there had been so much movement we felt the CEOs’ interest — and a follow-up blog — were entirely appropriate.

The nickel market is in a state of oversupply. Although global stainless demand has been robust, much of it has been in China with Western markets depressed. Even next year, HSBC projected in a recent report that the world’s stainless output would contract by 2 percent in 2012 while China’s would continue to grow by 10 percent, thus keeping global stainless output up at 3 percent year-on-year.

Lower nickel prices encourage the use of more primary nickel in stainless production, as well as an increased production of austenitic stainless steel grades. According to Brook Hunt, quoted by the bank, 2011 production of austenitic stainless steel was up 4 percent in Q4 from the previous quarter, to 6 million tons, with the ratio of austenitic steel up to 72 percent in Q4 from 71.4 percent in Q3. The bank forecasts 2012 global nickel consumption to increase by 7 percent to 1.7 million tons, with the bulk of this demand coming from China and other Asian markets.

Source: HSBC

As Chinese nickel pig iron (NPI) is in loss-making territory and many nickel producers are hovering around the break-even point at current prices, any further drop would result in mines and smelters being idled. The trend we identified back in December of falling NPI production (at that time nickel was around $16,500 per ton and NPI producers were losing money hand over fist) and rising Chinese imports of refined nickel has continued.

LME nickel inventories have been down 34 percent in the last 12 months to 94,000 tons, indicating a tighter physical market, with primary nickel being preferred over NPI in China — no doubt creating a spur to the draw-downs. The big unknown is how quickly new mine supply arrives on the scene. At least two of them — Goro and Ambatovy — rely on the problematic High Pressure Acid Leach process that has proved challenging to bring on stream. Both projects are already 12 months overdue, but even so, HSBC believes of the seven new major projects in their late development or early ramp-up stages, five will be producing in 2012, adding 80,000 tons to global supply.

Source: HSBC

Even accepting that there is a risk, these may not all deliver on time. The probability is the market will remain in surplus, yet the cost structure of the industry does not allow for a prolonged sell-off from current levels; the market remains in a kind of balance with NPI production proving less attractive (and a slight shift to austenitic grades encouraging more refined metal uptake supporting prices), but counter-balanced by the oversupply position, capping a strong rise in prices.

For once, the fundamentals are asserting themselves on a metals market – long may it continue.