Back in September at Glencore’s Investors Day, Director of the Nickel Commodity Department Kenny Ives said the Indonesian mining ban, if implemented, had the potential to double or even triple the nickel price – in fact, “the sky’s the limit” were his words, if I recall correctly. At the time, nickel on the London Metal Exchange was under $14,000 per metric ton, and not a few participants raised their eyebrows at each other as if to say “nickel miner talking up the market.”
Today, the nickel price is over $20,000 per metric ton and rising. Last week it rose nearly $2,000 in the space of a couple of days. According to a Bloomberg article, Citibank reported last week that the price could rise to over $30,000 next year as the nickel market swings to a deficit of 132,200 tons next year from a surplus of 13,800 tons this year.
Is the Indonesian ban solely responsible for such a profound change in market sentiment? It’s been a slow burn since the beginning of the year as investors and consumers waited to see if the ban would hold and if the Indonesian government was serious.
They Were Serious
As it became apparent they were, the price has risen. Since the market is not yet suffering any real shortages, as Reuters observed hot investment money is flowing into the nickel market at a rate not seen in the base metals markets for many years. The news service reports LME market open interest has mushroomed to a record high of 310,350 lots from 230,000 lots at the start of the year. While in the options market, activity is even more intense, April volumes of almost 143,000 lots were not only a fresh monthly high but were around half of what traded over the entire course of 2013. Apparently, punters have been snapping up call options, which give the right to buy, at strikes of up to $30,000 per metric ton.
Is This Justified?
Well, Indonesia’s export ban has removed almost a third of the world’s mine production from the market, until smelters are built that loss of metal will technically put the market into a pronounced deficit. The authorities in Indonesia are talking up the rate of investment and number of planned smelters. Nine nickel plants are scheduled to be completed this year. They say two ferronickel and seven nickel-pig-iron smelters, according to data from the Energy and Mineral Resources Ministry.
Smelters Require More than Construction
While as many as 63 smelters may be built by 2017, including 40 nickel plants, 10 iron ore smelters and four copper-cathode smelters, according to the ministry’s data which was presented at a seminar in Jakarta on April 30. All this assumes power can be made available and therein lies one of many problems.
Apart from the economics of building Greenfield smelters, already highly doubtful as the fierce cutbacks in established miners capex budgets around the world shows, many of these resources are scattered over Indonesia’s 17,000 island archipelago, where rudimentary port facilities and a road to the mine are about the only infrastructure present.
Nowhere But Up
Meanwhile, workers are being laid off by the thousands and while there is domestic support for the ban among city dwellers, workers and more remote communities dependent on the mines for their livelihood are getting increasingly vocal. For the time being, though, the ban is holding and the government is adamant their plan is working.
As a result, the hot investor money is, and will continue, to flow into nickel boosting its price. As the strike prices on those options approaches, parties holding the other side of the deal will have to buy metal to cover their positions further boosting the price.
For the time being, nickel only seems to have one way to go.