COLUMN-Nickel market bets the bank on Indonesian ore ban: Andy Home

Fri Feb 28, 2014 7:30am EST

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(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON Feb 28 (Reuters) - Indonesia's January ban on the export of nickel ore is, according to French nickel producer Eramet, "good news and will eventually support nickel prices".

Eramet Chairman and Chief Executive Patrick Buffet's view, expressed in the company's annual results release, that the ban "is a positive step towards restoring market balance" pretty much sums up the consensus view of the market.

After all, the January halt to flows of nickel ore to China's giant nickel pig iron (NPI) sector puts at risk an estimated 482,000 tonnes, or around 25 percent of global supply, according to estimates by analysts at Macquarie Bank. ("Indonesian Ore Ban - a Q&A", Jan. 14, 2014)

The ban is a potential game-changer for a market that is suffering from chronic low prices resulting from high stocks and supply surplus.

The collective expectation, and hope for other nickel producers, is that the ban will over time generate two interlinked bullish trends.

If Chinese buyers up their intake of ore from the Philippines, the only other viable source, the lower quality of that ore will push up the cost of NPI production, effectively lifting the global cost curve.

Then, since it is extremely doubtful that the Philippines can fully replace Indonesian supply, China's NPI producers will start to cut production as their stockpiles run out. That raises the prospect of the country turning to more traditional forms of nickel to keep its stainless steel sector humming.

It's an attractive narrative, so much so that the rest of the nickel world is betting big on the Indonesian ban staying in place.

NO CUTBACKS

One of the stand-out features of the Q4 2013 reporting season is the absence of fresh nickel production cuts.

The only significant announcement came from Eramet itself, namely the decision to defer a decision on the Weda Bay nickel project "given the deterioration observed on the nickel market in 2013 and the short-term outlook for nickel prices."

Everyone else is apparently going to hang on in there and hope the Indonesian ore ban eventually works its magic on "restoring market balance".

The supply-side response to the recent low price environment has been distinctly patchy.

Glencore-Xstrata has idled its ferronickel operations in the Dominican Republic, not the first time that this swing production has gone into mothball. It has also shuttered some of its Australian mining operations, as has Norilsk Nickel.

Other than that the main casualty has been Mirabela Nickel , currently in voluntary administration as it tries to restructure its debt after being hit by the closure of one of its main clients, the Fortaleza nickel smelter in Brazil. Mirabela's own Santa Rita mine is still operating but at a reduced rate.

The impact of such closures has done little to realign supply with demand.

Global refined nickel supply still surged by almost 11 percent last year to 1,944,700 tonnes, tipping the market into 173,000-tonne surplus, according to the latest assessment by the International Nickel Study Group (INSG).

MORE SUPPLY

That highlights the fact that rather than trimming production, nickel producers are still ramping up new projects, many of which were given the green light six years ago when the nickel price surged to $50,000 per tonne.

Glencore, for example, is currently bringing on line its 60,000-tonne per year Koniambo ferronickel project in New Caledonia.

The first line came on stream last year, producing 1,400 tonnes of metal, with first ore to the second line due this quarter.

Vale is also lifting production at its Onca Puma operations in Brazil after a one-year suspension of the new project due to furnace blow-outs.

By December the plant was running at around 62 percent of its nominal capacity of 25,000 tonnes per year (basis single furnace operation).

Then there are the high-pressure-acid-leach projects (HPAL), several of which have experienced technical delays but most of which are now also accelerating run rates.

HPAL PROJECTS RAMP UP

First Quantum's Ravensthorpe mine produced 29,000 tonnes of nickel in hydroxide last year, the best performance since operations began in 2011. Guidance for this year is 33,000-37,000 tonnes, at or close to effective capacity.

The Ramu project in Papua New Guinea uses the same production template as Ravensthorpe, producing a mixed hydroxide that requires further refining.

Production last year of 11,400 tonnes of contained nickel failed to meet guidance of 15,500 tonnes, according to minority shareholder Highlands Pacific. But the plant was operating at around 50 percent of nameplate capacity by the end of this year and guidance for this year is for production to rise to 22,000 tonnes before reaching full run-rates of 31,150 tonnes in 2015.

The Ambatovy project in Madagascar, operated by Sherritt International, is more ambitious in terms of using HPAL to produce refined metal.

It too has had teething problems, last year's production of 25,000 tonnes falling short of original guidance of 35,000 tonnes. But the plant is performing well enough for Sherritt to have recently declared commercial production, defined as 70 percent ore throughput relative to capacity, and to be targeting production of 40,000-45,000 tonnes this year.

That leaves only Vale's Goro, the original HPAL problem child, still struggling to get to grips with what has proved to be challenging technology.

There was another unscheduled shutdown at the plant during the fourth quarter and although last year's production of 16,300 tonnes contained nickel was the best outturn yet in three years of operations, it's still way short of nameplate capacity of 58,000 tonnes per year.

REBALANCING

All of these new projects will continue to ramp up over the coming months since operators need to recoup what were often huge investment outlays.

The only constraint will not be price but technical operation, particularly in the case of the HPAL producers.

Over the short term this will mean more surplus production adding to already bloated stocks. Nickel inventory registered with the London Metal Exchange continues to hit fresh record highs and may only be the tip of a much bigger stocks iceberg.

You can start to understand why so much hope is being pinned on Indonesia sticking with its ban on nickel ore exports.

Without this clear and present threat to China's NPI sector, it's hard to see how the nickel market would rebalance itself any time soon.

The problem, though, is one of timing. China has large buffer stocks of ore sitting at its port and the world has large buffer stocks of refined metal.

The expected bull impact on nickel price is going to be a slow burner. So much so that there is a risk that things may change in the interim, whether it be in the form of a policy change in Indonesia following the parliamentary and presidential elections in April and July respectively or new NPI producers getting up and running in Indonesia.

That, after all, is the stated intention of the ban, to force the mining sector down the path of value-add. And the cost of building an NPI plant is a much lower hurdle than, say, building a new copper smelter.

The consensus view that the Indonesian ban is "good" for the nickel price is entirely logical but far from certain given the time lag before Chinese NPI production starts to be tangibly affected.

However, it's the only bull narrative in town and with no more voluntary cutbacks and new projects coming on stream, the rest of the world's producers are apparently betting the bank on it. (Editing by David Evans)

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