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2014 Outlook: Nickel

Dec 31, 2013 | 08:00 PM | Rey Mashayekhi

Tags  Nickel, London Metal Exchange, Jonathan Presseau, Traxys North America, MMC Norilsk Nickel, Vale SA, Glencore Xstrata Plc, Rey Mashayekhi

While most base metals were underwhelming in 2013, perhaps none underperformed as much as nickel. As is often the case, nickel’s plight has come down to the most basic of economic principles: supply and demand.

Simply put, the global market is flooded with material. London Metal Exchange nickel stocks hit record levels repeatedly this past year, surpassing 250,000 tonnes in late November. As a result, nickel prices were decimated; after reaching a 2013 high of $18,665 per tonne Feb. 4, the LME’s three-month nickel contract plummeted nearly 29 percent to a low of $13,340 per tonne Nov. 28. In the weeks following that mark, volatility continued to be a force in LME stocks, making life very difficult for producers, all of whom have been affected one way or another, regardless of size or location. 

The world’s largest producer, MMC Norilsk Nickel, announced a revised strategy that will see the company divest most of its foreign assets, while No. 2 producer Vale SA has looked to a “value over volume” approach that will result in the idling of some unprofitable operations. 

Vale also is discussing potential synergies in Ontario’s mineral-rich Sudbury basin with rival producer Glencore Xstrata Plc, which itself cited market conditions when deciding to temporarily shutter its Falcondo operation in the Dominican Republic. 

And no nickel producer has been spared from thinning margins—and often painful losses—on their balance sheets.

Surprisingly, however, nickel market challenges aren’t necessarily a result of weakening consumption. “In terms of consumption, 2013 has been a great year for nickel and I suspect 2014 will be too,” Metal Bulletin Research senior analyst Robert Cartman told AMM. “Consumption (in 2013) was up nearly 8 percent year on year and will probably grow at a similar 6 to 8 percent (in 2014), mainly due to rising stainless output in China.” The trouble, he said, is that nickel production “has outstripped consumption, and that is why you have the problem of oversupply and rising LME stocks.”

As is often the case these days when discussing global economic markets, China is the elephant in the room. 

Chinese nickel pig iron production has grown exponentially over the past several years, providing the country’s massive stainless steel industry with a seemingly endless supply of cheap, albeit low-grade, nickel. 

The primary source of the material has been ore imports—especially from Indonesia, the world’s largest nickel ore exporter.

But the raw material export ban implemented Jan. 12 by the Indonesian government, with the goal of promoting that country’s domestic nonferrous industry, will impact the Chinese stainless sector’s bread-and-butter supply. 

The Indonesian ministry of energy and mineral resources announced in early December that the ban on “all exports of mineral raw material for further purification” would be “applied without exception.” LME nickel prices rallied in wake of the news, with the exchange’s three-month nickel contract moving back above $14,000 per tonne Dec. 10. 

In its quarterly global outlook released Dec. 9, Barclays Capital Plc said nickel was its “preferred base metal long for early 2014,” citing the Indonesian ban, as well as production cutbacks from refined nickel producers, as indicating the beginning of the end of a period of “structural oversupply” in the global market.

Still, the outlook isn’t great in the short term. Even with the Indonesian export ban, China reportedly has enough nickel ore sitting in its ports—300,000 tonnes of nickel contained in ore at the end of October, according to Metal Bulletin Research—to last for months.

“The Chinese probably have six months of (ore) inventory at the ports which they can make nickel pig iron with,” said Jonathan Presseau, a nickel trader at New York-based Traxys North America LLC. “The cost savings are hundreds of dollars a ton to produce generic, 301-grade stainless, compared with doing the same here (in North America) with scrap and primary nickel. There’s a constant overhang.”

As a result, “2014 is indeed shaping up to be tough, with a large surplus expected similar to (2013),” said Gordon Buchanan, a trader at London-based Stratton Metal Resources Ltd. “An outright ban on Indonesian ore (in) January could produce quite a spike in the LME price, with $15,000 (per tonne) or more conceivable. However, with ... potentially 50 percent in stock at Chinese ports, it would take some time for NPI production to be affected.”

So with Chinese stainless mills seemingly set on material stocks for 2014, the question is how nickel will perform in the face of continuing adverse market conditions.

“The only way prices will appreciate significantly during 2014 is either (through) the Indonesian export ban, or other nickel producers close down, thereby reducing supply,” Cartman said.

With the ban now in effect, “then an initial strong rally is possible ... before prices settle down,” Cartman said. “Then prices may really begin to head up, toward $20,000 per tonne again, from around mid-2014.”

According to news reports, global nickel prices and mining shares rallied in the first trading day after the ban in the world’s top nickel ore exporter. 

But the Indonesian government has not yet published the regulations clarifying the changes, although it reportedly has offered no relief to the nickel industry. Until then, it appears the global nickel market will have to wait and see what the long-term effects of the ban will be.

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