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Roller coaster ride

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It has been a tumultuous year for the global nickel market. A whirlwind of economic factors—including supply-and-demand dynamics and, perhaps most critically, government regulation—spurred prices to highs not seen in years . . . only to see them plummet back to earth.

The effects have been felt by a multitude of industries, ranging from the primary nickel producers who depend on decent prices to turn a profit to the stainless steel scrap suppliers whose margins depend on the intrinsic value of the material. No one knows for sure how things will shape up over the next 12 months, but one thing is certain: It will be fascinating to watch.

A year ago, the global nickel market was dealing with an arguably unprecedented level of oversupply. London Metal Exchange nickel stocks surpassed 250,000 tonnes in November 2013, with the LME’s cash nickel contract closing at a nadir of $13,270 per tonne ($6.02 per pound) at the end of the month. Chinese stainless steel producers, accounting for virtually half of the world’s total crude stainless output, were relying comfortably on a burgeoning nickel pig iron (NPI) industry that gave them all the raw material they needed thanks to a steady supply of nickel ore from Indonesia.

The only thing seemingly capable of altering the status quo at the time was legislation proposed by the Indonesian government—scheduled to take effect in January 2014—that would ban exports of raw material and ore to encourage the development of a domestic mineral refining industry. Nobody knew whether the ban would be successfully implemented, or how the Chinese stainless steel market would respond, although China’s NPI industry stockpiled ore imports in the event that the measure came into effect.

Sure enough, the spigot ran dry in January. Indonesia eliminated virtually all raw material exports, and the Chinese seemingly would have to rely on whatever material they already had—plus what they could find elsewhere from other exporters—to support their stainless steel industry.

Almost immediately, nickel prices rallied. Prices would eventually crest in May, eclipsing $21,000 per tonne ($9.53 per pound), the highest level since February 2012. Nickel producers rejoiced, and analysts predicted that prices would eventually reach $25,000 to $30,000 per tonne ($11.34 to $13.61 per pound) once China’s Indonesian ore stockpiles ran out in 2015. North American and European stainless steel producers were enticed with the prospect of a Chinese industry no longer able to rely on cost-efficient NPI, which had provided China with a clear-cut advantage over global competitors.

Such optimism prevailed in the market through September. And then, slowly, it became apparent that the China factor was going nowhere. The ace in the hole for the Chinese NPI industry was the Philippines, which ramped up nickel ore exports to China as Indonesian exports dried up. Once
it became apparent that Chinese NPI producers would—for the time being—get the raw material they needed, LME nickel prices began descending rapidly back toward 2013 levels.

Prices on the LME have stabilized somewhat since hitting a seven-month low of $14,650 per tonne ($6.65 per pound) Oct. 27. The LME’s cash nickel contract rebounded and surpassed $16,000 per tonne ($7.26 per pound) in late November, with Rio de Janeiro-based mining company Vale SA saying in October that it expects further recovery as ore exports from the Philippines should be impacted by the rainy season.

While acknowledging that the "overall resilience of NPI production in China, so far, has surprised the market," Leon Westgate, commodities strategist at London-based Standard Bank, said recently that tighter Chinese ore stocks are imminent.

And as for Indonesia’s ore export ban, "the message is very clear: there is no
expectation of any form of relaxation of the current export ban measures," analysts at New York-based Citigroup Inc. said in November.

"In 2014 as a whole I think we’ve seen
the market overreact both ways," Metal Bulletin Research senior analyst Robert Cartman told AMM. "2014 has certainly been volatile but on the whole was better than 2013, as was expected." Global nickel consumption increased 8 percent in 2014, he said, with a "possibly slightly lower" increase of around 6 percent expected in 2015. Meanwhile, production "has not grown at all during 2014, and 2015 will be similar—certainly any growth will be at a slower rate than consumption."

As for Chinese NPI, Cartman said that while "increased exports of nickel ore from the Philippines have helped, Filipino ore is not of a high enough grade to substitute (Indonesian) ore completely and indefinitely," adding that Chinese NPI producers have had to deal with higher production costs as a result of the lower-grade ore.

Meanwhile, an "expected seasonal fall in Filipino ore exports until March (or) April will only hasten the rundown of ore stocks in China," Cartman said, "so the next few months could see nickel prices rally strongly again," with a move up toward $18,000
per tonne ($8.16 per pound) or even $20,000 per tonne ($9.07 per pound) "certainly feasible."

Refined nickel producers have continued to express optimism in the wake of such tumultuous conditions, even as LME nickel stocks have only maintained their ascent. Warehouse stocks clocked in at 399,996 tonnes at the end of November, although market participants noted that much of that material is tied up in warehouse agreements.

Vale recently celebrated the first nickel production at its Long Harbour nickel processing plant in Newfoundland and Labrador, which uses hydromet technology to process sulfide-based nickel ores. Company president and chief executive officer Murilo Ferreira said that Vale expected to pass Moscow-based MMC Norilsk Nickel "to become the largest nickel producer in the world" by the end of 2014.

Refined nickel market participants still expect circumstances to catch up with the Chinese NPI industry sooner or later.

"I watch the price of NPI and ore, and it appears like we’re reaching a bottom," said Jonathan Presseau, a nickel trader at New York-based Traxys North America LLC. "Once I see it start to go up, that’s the traders in China indicating that their Indonesian stocks are depleting. . . . We know (Filipino ore) increases their cost of production.

"I say we go into a deficit (in 2015)," he said, predicting an average nickel price of around $19,500 per tonne ($8.85 per pound), but noting that the deficit may not come to fruition until later in the year. "Everybody forecast the perfect storm (in 2014) and everybody was wrong. . . . It’s one of those things where it should happen, but it’s just a matter of when."


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