Nickel Pig Iron

Our Stainless MMI rose to 55 points in July thanks to a recovery in nickel prices. Nickel finally climbed to five-digit territory in July, trading near $10,000 per metric ton on the London Metal Exchange, its highest level in eight months.

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A factor supporting nickel prices this year is expectations of lower nickel pig-iron ore exports from the Philippines. Ore producers in the Philippines warned earlier this year that they would cut production due to low prices. So far, Chinese imports of Philippine ore fell by 27% in the first five months of the year.


But price momentum picked up last month following recent news that the Philippine government would review all mining operations in the country. The new President-elect, Rodrigo Duterte, ran on an anti-mining platform and could impose an Indonesian-style raw ore ban, which could potentially disrupt supplies for Chinese buyers.

New Philippine Government

In addition, the new mining minister, Regina Lopez — a committed environmentalist — provided the latest trigger for a rally after saying that there would be a ban on fresh mining exploration in the country for a month while all existing mines are being reviewed.

The expectation is that mines could potentially have their licenses revoked. At the beginning of July, the Philippines already ordered the suspension of operations at two nickel ore mines for environmental violations and the government halted the issuance of exploration permits as a nationwide crackdown led by the mining minister begins.

Nickel’s Bullish Backers

This bullish price action also follows a broad recovery in the whole metal complex this year, which gives more credibility to nickel’s bulls. Our historical analysis shows that a metal has far greater upside potential when the overall commodities market is in bullish mode, while its chances of going down increase in a falling commodities market. While we continue to see bullish sentiment in commodity markets, investors will continue to react in a bullish manner on news like potential supply cuts in the Philippines.

On the other hand, not everything is bullish about nickel. Most analysts call for a deficit this year due to stainless mills having to rely more on refined nickel. This deficit would follow a five-year period of surplus but estimates are for a deficit of less than 100,000 mt this year. That is not a big number considering that LME and Shanghai Futures Exchange inventories currently account for around 500,000 mt combined, at least five times more than the expected deficit.

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MetalMiner’s most recent stainless price index reading.

If you’re a stainless producer, scrap buyer or stainless-buying manufacturer, it’s (hopefully) no surprise to you that the nickel market has been tanking – hard.

As the Institute of Scrap Recycling Industries (ISRI) Commodities Roundtable conference kicked off Day 1 here in Chicago, one thing was clear: the expert consensus at the Stainless/Nickel roundtable leaned toward a pessimistic optimism – or should we say an optimistic pessimism?

Either way, as we wrote in our most recent monthly metal buying outlook report for September, nickel prices have lately been chasing 2009 lows – as of yesterday, the LME 3-month price has lost 33% of its value year-to-date.

Key Facts and Figures

Salvatore Pinizzotto, director of market research and statistics at the International Nickel Study Group (co-located in Lisbon along with the International Lead and Zinc Study Group and International Copper Study Group), showed just how China-heavy the data still is. Here are just a few notable stats and numbers from what he presented:

  • More than 100,000 metric tons. That number represents the maximum discrepancy between several market analysts’ past estimates of Chinese nickel pig iron production, many within the same year; and the max discrepancy between analysts’ estimates of European nickel usage based on ‘wildly’ different estimates of scrap ratios – major points underscoring the need for accurate measurement of nickel markets
  • 52%. The percentage of global nickel usage that China accounts for in 2015, up from a mere 15% in 2005. That increase has brought Asia’s overall usage to a total of 70% of the global pie. China’s NPI production (although having fallen off throughout 2014 and into Q1 2015 due to environmental restrictions) and subsequent stainless production continue to chug along. (Pinizzotto agreed with our take that China making stainless production cuts would ultimately help the nickel and scrap markets.)
  • 325,000 tons. Roughly the total volume of ferro-nickel imported by China in the first half of 2015, a significant jump from the previous period. This is a broader testament to overstocked inventories across the board: ore surpluses, refined metal in exchange warehouses, NPI being pumped out of Chinese mills and plenty of ferro-nickel – all are conspiring to keep nickel prices low for the foreseeable future.

As I caught Pinizzotto saying at one point, “We don’t want to be too pessimistic…but we’re not that optimistic.”

Here’s my colleague Jeff Yoders’ coverage of how the stainless/nickel markets and “the China Effect” look through a US economist’s eyes – and for ferrous-market fans, read about the panelists’ latest outlook.

Need more detailed purchasing information? Get a free sample copy of our monthly metal buying outlook report – including nickel/stainless.

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.

Free Download: Cut Your Nickel Shipment Costs

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.


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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