My colleague Taras posted an article this week on the stainless market in North America drawing on comments coming out of the Institute of Scrap Recycling Industries conference in Chicago. Taras reported most industry experts felt the medium-long term future for stainless to be very positive, citing growth in many high-end applications such as oil & gas, nuclear and petrochemicals. Even the commodity end of the market was felt to have good growth prospects looking past the immediate short-term weak consumer market. However, Taras only had time for a brief comment on the role nickel pig iron is playing in supplying nickel content to the largest stainless-producing country in the world (China) so we’re following up with a more detailed analysis of the role this source of nickel plays in both stainless production and the primary refined nickel price.
No discussion of nickel prices has historically been complete without mention of the state of stainless production, as roughly two-thirds of primary nickel is consumed directly in the stainless steel industry. As with many metals, China rise to largest stainless steel producer hasn’t happened unaided — one of China’s advantages is a source of relatively low-cost nickel that in recent years has given domestic producers a competitive edge over foreign rivals.
In a recent article, Energy Digital quoted various industry and research sources to explore nickel pig iron’s role in the supply of nickel content to China’s stainless producers. Nickel pig iron (NPI) is made from low grade (1-2% Ni) nickel laterite ore combined with coking coal and a mixture of sand and gravel aggregates that is heated in a blast furnace or electric arc furnace depending on the desired grade. Following further sintering and smelting to remove impurities, the end result is a nickel iron alloy or ferro nickel material of lower purity (but cheaper) than conventional ferro nickel.
According to Jim Lennon in a Macquarie Research Report, purities range from 1.5% to 8% Ni content for NPI being produced from blast furnaces and 1025% Ni for NPI produced from electric arc furnaces. Under Beijing’s pressure to close small, less efficient steel blast furnaces, a major transformation has taken place as these sub-200-cubic-meter capacity furnaces have switched to making NPI. Since about 2005, NPI production has mushroomed in China and is still rising; analysts estimate output in China could grow by 50 percent this year, a jump to 240,000 metric tons from 160,000 tons in 2010.
Those Chinese stainless producers with captive NPI production capacity can access nickel at the equivalent of about $21,000 to 22,000 per ton, the estimated marginal cost of NPI production, giving them a very significant advantage over producers elsewhere. During the first half of this year, refined nickel was trading on the LME at between $23,000 and $29,000 per metric ton, although since early August the LME price has bounced along between $20,000 and $22,000 per ton.
Stainless production has been weakening in Europe and Asia during the summer. After a record first quarter at 8.39 million tons, the flat second quarter showed no global growth and the third is widely expected to be down. Meanwhile nickel supply has increased, although a number of new mine and production setbacks have delayed increases in capacity into the second half, such that the WBMS estimates the first half 4,900-ton surplus to be higher in the second half. According to Reuters, the consensus for 2012 is a 30,000-ton surplus.
Interestingly though, nickel stocks have been falling steadily at LME warehouses, particularly in Asia. Reuters‘ Andy Home puts this down to speculators positioning ahead of a rumored physical nickel ETF to be launched in China later this year; the SHFE does not have a nickel contract. Whether that is correct or whether it is Chinese stainless mills buying refined nickel in preference to NPI as the LME approaches the NPI marginal cost of production is not clear, but such trends may reverse by year end if the slowdown in stainless production continues.
The extent to which NPI production in China continues to give Chinese stainless mills an advantage remains to be seen in a market with markedly lower refined nickel prices, but what is clear is the rise of NPI in China has created a partial disconnect in the previously held direct correlation between stainless production and demand for (and hence price of) refined nickel.