nickel

Under Vladimir Putin, Russia bet its future on its abundant natural resources, believing it was irreplaceable as an energy source to the economies of Western Europe.

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Russia pumped oil and gas, nickel, aluminum and other commodities at the expense of building its manufacturing base. With few exceptions, manufacturing suffered at the alter of a strong ruble and, for a time, was flattered by a strong domestic economy playing catch up after years of Soviet waste. The following graph of real effective exchange rate against exports of non-oil goods shows how the strength of currency correlates with falling exports of manufactured goods.

Source Telegraph

Source: London Telegraph

But now, a combination of falling commodity prices, particularly oil and gas, and western sanctions following Russia’s misadventure in Ukraine in 2014, have left the economy in a state of decline. According to the London Telegraph Russia is running a budget deficit of 3.7% which may not sound like much, but for an economy without developed capital markets it shouldn’t be running a deficit at all according to sources quoted by the paper.

Effective Default

Nor is it just central government, a report by the Higher School of Economics in Moscow warned that a quarter of Russia’s 83 regions are effectively in default as they struggle to cope with salary increases and welfare costs dumped on them by President Vladimir Putin before his election in 2012.

“The regions in the far east are basically bankrupt,” the bank Unicredit is quoted as saying. The central bank is burning through foreign exchange reserves initially in a wasted attempt to support the ruble, which has now been allowed to free fall, but the authorities are continuing to support companies having to roll over foreign currency debt as it comes due.

Source Telegraph

Source: London Telegraph

Some $86 billion in outstanding debt is coming due this year and supporting that has contributed to a reduction in official reserves from $524 billion in 2014 to an estimated $340 billion today when various commitments are stripped out.

Economic Contraction

The economy has contracted by 4.9% over the past year and, as oil prices resuming their bear market trend, this is likely to worsen. Half of Russia’s tax income comes from oil and gas, yet output from Gazprom has fallen by 19% this year while revenue is likely to fall by almost a third to $106 billion in the face of falling demand and lower prices. Core inflation is running at 16.7% and real incomes have fallen by 8.4% over the past year, by comparison a far deeper cut to living standards than occurred following the Lehman Brothers crisis.

Source Telegraph

Source: London Telegraph

Gazprom alone generates a tenth of Russian GDP and a fifth of all budget revenues, the paper reports. Oil is an even bigger worry. In volume terms, the spigots are wide open and Russia is pumping nearly 10.7 million barrels per day with the help of a new tax regime but even Lukoil’s vice-president, Leonid Fedun, said in March that Russia’s oil output could fall 8% by the end of next year, taking 800,000 barrels per day out of global markets as a lack of investment fails to reverse the depletion of old soviet era wells.

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Normally that would be enough to rally oil prices, but with Iran about to add twice that to an already over-supplied market the result will likely be lower prices and lower revenue for the Russian economy for years to come.

No Way Out

It is hard to see what the answer is for Russia, with so many of the country’s assets in the hands of so few individuals close to the president, the model is unlikely to change anytime soon. A desperate Russia is potentially a more dangerous Russia and with power in the hands of a small clique it is hard to predict how it will react as the screws of the global commodity market tighten. But, having worshiped at the alter of commodities for virtually all his presidency, Mr. Putin in unlikely to change or be able to change religion in time to avert a more serious deterioration of the Russian economy in the months and years ahead.

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Nickel Drivers

July 2015 Monthly Metal Buying Outlook copy

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1. Dollar to Euro exchange rate

2. Stainless steel global production

3. Global capacity utilization

4. China coking coal prices (impacting Chinese nickel pig iron production)

5. China GDP & PMI data

Market Commentary

Nickel fundamentals do not tell a very good story if you are a stainless producer or service center. However, buying organizations likely feel differently about bearish metals. Nickel faces a number of headwinds that will continue to put pressure on prices.

Specifically, nickel suffers from weak global demand, excess service center inventory levels, an Indonesian export ban that failed to do what it intended to do (we’ll come to that in a moment) and increased stockpiles in China (although we do not accept the one-to-one correlation that higher inventory levels necessarily equate to lower prices and vice versa, lower inventory levels don’t necessarily equate to higher prices).

Service centers tell MetalMiner that inventory levels remain well above historical “healthy” MOH averages (about 2.4-2.6). Instead, inventory levels are up over 3.5 months, seasonally adjusted. This is a very bearish indicator. Demand has slowed for the typical summer slow-down. Service centers report transactional business is slow.

The Indonesian Export Ban

As many are aware the Indonesian government banned the export of unprocessed minerals back in January of 2014. Instead of having the desired effect of generating new investment for higher value added processing in country, exports have dried up and the government has begun tinkering with the ban to allow for some copper exports. The ban on nickel and aluminum exports remains intact but news reports suggest the ban for bauxite might be lifted which may be an indicator that the government could change its policy.

Regardless, this too is a bearish factor weighing on nickel.

The Outlook

Three-month nickel closed the month of June at $12,000/mt, sliding to a 6-year low. Nickel is in free-fall as shortage expectations faded. The long-term outlook remains bearish, especially while the rest of base metals keep falling. We expect to see high price volatility in the coming months.

So What Should My Industrial Buying Strategy Be?

This nickel price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!

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July 2015 Monthly Metal Buying Outlook copy

Pre-order August Metal Buying Outlook report here!

For the past three months, we’ve delivered complimentary Monthly Metal Buying Outlook reports as you formulated your 30-day strategy for sourcing aluminum, copper, nickel, lead, zinc, tin and steel (HRC, CRC, HDG, Plate). We received a ton of feedback based on these reports (overwhelmingly positive) and our proud to announce the commercial product launch beginning with the August Metal Buying Outlook report!

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Screen Shot 2015-07-01 at 11.56.49 AMIt’s been a wild ride, but after three months of adding, subtracting, nip/tucking and perfecting, we are finally at the July metal buying outlook – the third and final complimentary MetalMiner™ Monthly Metal Buying Outlook – the only July metal price forecast and market commentary you will ever need.

Lisa Reisman, CEO, Azul Partners and executive editor, MetalMiner, is back with her tool kit and expert insight into the industrial metals aluminum, copper, nickel, lead, zinc, tin and steel (HRC, CRC, HDG, Plate) so you can formulate your short- and long-term buying strategy.

While this is the last complimentary Monthly Metal Buying Outlook, we are excited to announce the launch of the commercial product on Aug. 1.

Beginning in August, we will offer the Monthly Metal Buying Outlook for $899/year. That’s less than $75/month for 12 reports, or an annual subscription.

Check out the complimentary July report!

More About Lisa

A third-generation metals enthusiast, Lisa Reisman founded MetalMiner in 2007 – 13 years after she began trading semi-finished aluminum metals and 3 years after she was tasked by the CEO of a Tier 1 automotive company to save his company some money on their direct material spend. Lisa is an ex-big 5 consultant who built MetalMiner into the largest online publication for metal-buying organizations, and has the experience and depth of insight to produce this one-of-a-kind invaluable monthly report to impact your industrial metals purchasing strategy.

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Nickel hit a six-year low yesterday as Greece’s debt crisis obliterated confidence in global growth.

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The London Metal Exchange’s Index of six industrial metals is heading for a fourth-straight quarterly loss, the longest such streak since 2001. Greece’s standoff with its creditors is adding to economic concerns amid a slowdown in China.

Stainless_Chart_June-2015_FNL

Nickel for three-month delivery retreated 4.9% to settle at $11,835 a metric ton at 5:51 p.m. on the LME, the biggest drop since Sept. 9. The price touched $11,730, the lowest since May 2009. The metal has lost 22% of its value this year.

Daily LME data showed nickel stocks rose 870 mt to 459,018 mt, halting a falling trend seen since the start of June and again sowing doubts that the market is poised to tighten significantly.

The Shanghai Futures Exchange (ShFE) approved three new nickel brands – including OAO Norilsk Nickel – today for delivery against its contracts as persistently high stockpiles and risk aversion over Greece weighed on the market.

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Architecture billings increased in May, while Morgan Stanley changed its forecast for nickel prices to a more bearish outlook.

ABI Back in Positive Territory

Led by growing demand for new schools, hospitals, cultural facilities and municipal buildings, the Architecture Billings Index (ABI) increased in May following its second monthly drop this year. As an economic indicator of construction activity, the ABI reflects an approximate nine to 12 month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 51.9, up from a mark of 48.8 in April. This score reflects an increase in design services (any score above 50 indicates an increase in billings).

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“As has been the case for the past several years, while the design and construction industry has been in a recovery phase, we continue to receive mixed signals on business conditions in the marketplace,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Generally, the business climate is favorable, but there are still construction sectors and regions of the country that are struggling, producing the occasional backslide in the midst of what seems to be growing momentum for the entire industry.”

Morgan Stanley Bearish on Nickel

Morgan Stanley slashed its nickel price forecasts for the second half of the year Tuesday as demand from stainless steel producers continues to be undermined by a deteriorating outlook for global growth. The bank cut its third quarter 2015 nickel price forecast by 12% to $13,228 a metric ton; and its fourth quarter outlook by 10% to $13,448 a metric ton.

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Engineers have produced a new nickel, copper and titanium “memory” alloy that that springs back into shape even after it is bent more than 10 million times.

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The journal Science reported that the new shape memory alloy shatters previous records for bending and is so resilient it could be useful in artificial heart valves, aircraft components or a new generation of solid-state refrigerators.

SMA_550

Shape memory alloy photo courtesy of Rodrigo De Miranda/University of Kiel.

shape memory alloys (SMAs) are already used in surgical operations and other applications. A stent, for example, might be squashed into a small space and then spring into its designed shape to prop open a blood vessel.

When SMAs are bent or otherwise structurally deformed, the stress (in the form of heat or electrical current) causes the SMA to spring back to its original design.

Yet, as a technology, the alloys have never entirely fulfilled their promise and entered the world of “high-cycle fatigue” applications.

“Usually shape memory alloys – like in minimally invasive surgery – they regain their shape once, or a few times, but not multiple times,” said Prof. Manfred Wuttig who developed the new alloy at the University of Kiel along, in Germany, along with colleagues from the University of Maryland. He is one of the paper’s senior authors and told the BBC. “This is highly unusual. It’s kind of a leap forward.”

The nickel, titanium and copper atoms are arranged in such a way that they can switch between two different configurations. This “phase transition” is what allows the alloy to snap back into shape after it has been bent. It can be triggered by heat, the metal can stay in a bent position when cold, or, in a different form of the alloy, it can happen as soon as tension is released.

The researchers’ paper in Science describes how, by embedding tiny impurity particles made from titanium-copper, SMAs can withstand deformation and re-formation up to 10 million times. This could open up SMAs for use in such high-cycle applications as refrigerator compressors and aircraft parts as well as more delicate surgical uses.

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The three-month aluminum price on the London Metal Exchange is back below $1,800/metric ton. In April, aluminum rallied with most industrial metals thanks to a weaker dollar. However, in May the dollar bounced back up, unwilling to give up more ground, hurting industrial metals.

Aluminum prices are now hanging near previous troughs. If the dollar continues to rally, we would expect aluminum prices to hit record lows this year.

Why Manufacturers Need to Ditch Purchase Price Variance

Same story with nickel, the metal rallied in April after hitting its lowest level in six years, but in May Nickel fell as well and now it’s near that record low. As with aluminum, a stronger dollar would put nickel prices into a tailspin.

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Nickel has perplexed and confounded investors for the last year or more.

Prices had been expected to rise on the back of an anticipated shortfall in ore supply, only for the expect opposite to happen. Yet Norilsk Nickel, in it’s latest 2015 Strategy update, reported in a Platts blog that China’s inventories of nickel ore are down significantly, with only around two months of consumption left.

Why Manufacturers Need to Ditch Purchase Price Variance

Norilisk also believes China’s dependence on imported refined nickel is set to rise. It estimates that total nickel demand in China in 2015 will be made up of 42% imported refined nickel, 47% imported feed, and around 11% of domestic feed.

Imports Rising

In 2014, by comparison, total nickel demand in China consisted of 28% imported refined nickel, 61% imported feed, and 11% domestic feed. In its 2014 full-year results, the company forecast a 20,000 metric ton global deficit this year down from a 93,000 mt surplus in 2014. While a number of analysts are also forecasting a revised deficit between 20,000-45,000 mt this year, you have to say previous predictions have failed to materialize so why would this time be any different?

Maybe the issue here is that Norilisk is a producer and they are going to be bullish by nature, and indeed not all agree with Norilisk’s estimate of the current situation. The World Bureau of Metal Statistics reported just this week that the nickel market was in surplus From January to March 2015 with production exceeding apparent demand by 32.9 kilotons, less of a surplus than was running in 2014 but still significant.

Nor did they see it trailing off, in March nickel smelter/refinery production was 147.8 kt and consumption was 137.1 kt suggesting the surplus is continuing and may run through Q2.

The long-awaited dearth of ore supply resulting from the Indonesian export ban last year has failed to materialize. Chinese buyers have switched to a blend of Indonesian and Filipino ores for making nickel pig iron and an increase in refined nickel imports to meet demand.

Demand: Still Down

Demand is down, anyway. The Chinese economy is growing more slowly and stainless production (the source of two-thirds of nickel demand) is, at best, lackluster. In addition we are now coming towards the quieter summer period when demand falls and so it is unlikely the demand side is going to force a change in the downward trend in prices. Demand has stabilized in Europe after previous years’ weakness, but distributors are said to be well stocked and a restocking cycle is unlikely when most are anticipating further weakness in the nickel price.

As prices have fallen, stocks have risen, most obviously on the London Metal Exchange. Part of this rise can be attributed to finance stocks moving out of China and into supposedly safer LME Asian warehouses, but even so some 446,000 mt of LME stocks are going to take some working through and those speculators that have headed for the exits are not likely to pile back in again until they see a sustained downward trend in stocks.

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Good news for stainless consumers, the nickel price dropped to its lowest level in six years this week as 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.

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