(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, April 10 The nickel market is on a
On the London Metal Exchange (LME) three-month nickel
has just hit a one-year high of $17,188 per tonne. The
stainless steel input is by some margin the best performer so
far this year among the base metals pack, up 22 percent since
the start of January.
And for good reason.
This is a market that has just lost almost a third of global
mine supply, a bolt of lightning unprecedented in the recent
history of commodity trading.
Effective Jan. 12 the Indonesian government banned exports
of nickel ore, cutting off a flow of material estimated by
analysts at Macquarie Bank at around 670,000 tonnes last year.
The resulting price surge in part represents collective
shock that this has actually happened. Although the ban was
codified into Indonesian law five years ago, everyone thought
the authorities would fudge the issue when the deadline came.
They didn't. The ban is total. Nor does anyone expect
anything to change after the double parliamentary and
presidential elections in Indonesia this year. There seems to be
consensus across the political spectrum that the ban, intended
to force the creation of value-added mineral processing in the
country, is the right thing to do.
As analysts now work through their nickel supply numbers,
there is a hardening consensus that this market is going to
switch from chronic oversupply to chronic supply shortfall.
Key questions, however, are how quickly, how far the price
might go and is the market already running ahead of itself?
Graphic on China's imports of nickel ore
Macquarie Bank's own bullish view is writ large in the title
of its most recent research note: "Nickel prices up 25 percent
in 2014 - you ain't seen nothing yet" (April 9, 2014).
It forecasts the global market shifting to small supply
deficit this year and to stay in deficit for the next four years
That will cause a dramatic run-down of stocks along the
supply chain and "we think that by 2016, the market will get
tighter than it did in 2006/07."
Gulp! That was a time when LME stocks, at one stage in
October 2006, totalled just 3,930 tonnes and the price went on a
stratospheric run to over $50,000 per tonne.
Underpinning Macquarie's forecast is a simple calculation
that the rest of the world is not going to be able to fill the
supply gap left by the Indonesian ban.
Other countries, most notably the Philippines and New
Caledonia, can produce nickel ore but not in sufficient quantity
or quality to satisfy demand from China's leviathan nickel pig
iron (NPI) sector.
Processing plants in Indonesia, in effect off-shoring
Chinese NPI production, are not going to be up and running
quickly enough. The first, according to Macquarie, will do well
to start operations by the end of this year.
The obvious implication is that China's stainless steel
sector is going to have to start switching from using NPI to
refined nickel for its raw material input.
So far, so largely uncontroversial. Macquarie's argument is
very much in line with consensus thinking, or the new consensus
thinking now everyone's realised Indonesian policymakers are not
going to change their minds on the minerals export ban.
Where Macquarie sets itself apart as bull cheerleader is in
its contention that this whole process is going to happen a lot
sooner than most people expect.
Everyone knows that Chinese NPI producers weren't sitting on
their hands as the Indonesian deadline approached. A significant
part of last year's imports from Indonesia went into
Macquarie itself estimates that such stocks represented
around 7-8 months of consumption at the start of the year.
In theory. In practice, though, things are slightly
Firstly, those stocks are not evenly distributed among
China's NPI producers. Smaller operators have much less
inventory on hand and they are already been squeezed by a second
The price of nickel ore in China is already accelerating
upwards, reducing availability as traders hold onto their stocks
in expectation of still higher prices.
That risks bringing forward in time the impact on actual NPI
Macquarie's view is that Chinese NPI output peaked in the
fourth quarter of last year and is now entering a pronounced and
steepening downturn. It estimates production of 375,000 tonnes
this year, down from 500,000 tonnes in 2013.
BEWARE THE JOHOR SHUFFLE
That still doesn't mean that the price of refined nickel is
going to go back to $50,000 any time soon. There are a lot of
stocks around, as might be expected in a market that has been
notching up cumulative years of production surplus.
Not least on the LME itself, where registered inventory of
278,844 tonnes is just shy of all-time highs.
Bulls can point to the fact that almost half of those
stocks, some 133,200 tonnes, are in the form of cancelled
warrants, denoting metal earmarked for physical drawdown.
In theory. In practice, though, that high cancelled tonnage
figure is a false signal in terms of market balance right now.
Most of the cancelled tonnage, 72,474 tonnes, is located in
the Malaysian port of Johor MNI-MYJHB-TOT, a location which
has for some time seen an extraordinary amount of cancellation
and rewarranting activity, far exceeding actual departure rates.
There have been almost 94,000 tonnes of cancellations and
26,000 tonnes of "reverse" cancellations at Johor this year and
those are only the daily net movements. The true total is
probably much higher.
Yet actual departures have totalled just over 10,000 tonnes
and have been offset by higher arrivals. Johor stocks of nickel
are up by a net 15,000 tonnes so far in 2014.
The "Johor Shuffle" is all about using nickel to get letters
of credit, a collateral trade that has been overshadowed by the
much larger amount of copper that is caught up in China's shadow
While LME stocks are sending an overly bullish signal about
the market's current as opposed to future need for nickel units,
the price rally is being accelerated by two other developments.
The first is the sheer weight of speculative money that has
flowed into the nickel market since prices first started moving
up in early January.
Market open interest MNI-MOI-TOT has mushroomed from a
January low of 231,000 lots to a current 295,700 lots. Quite
evidently, given the near $4,000 rise in price over the same
timeframe, this hasn't been people rushing to sell.
Market positioning is starting to look extreme and some sort
of pause for breath might already have taken place were it not
for the second accelerator.
Having lost a major slice of mine supply on Jan. 12, the
nickel market is now mulling the possibility of another
previously unexpected supply-side hit.
The tense and unpredictable geopolitical stand-off in
Ukraine has raised the prospect of harder and more far-reaching
sanctions against Russia. U.S. officials have mentioned mining
as one area for punitive sanctions if Russia tries to "do a
Crimea" in eastern Ukraine.
High on the hit-list would surely be Norilsk Nickel, which
last year supplied 232,000 tonnes of refined nickel from its
Arctic operations to the rest of the world, first and foremost
Now, a further escalation of the Ukraine stand-off is not
anyone's base case scenario but evidently it isn't a zero-risk
It has certainly helped put a bit more fuel on the nickel
fire. But maybe just a bit too much.
There is no disputing this market's bull narrative. The
implications of the Indonesian ban will be both far-reaching and
massively disruptive to China's NPI sector.
But the current rally risks consuming itself in its own
heat, the price apparently ignoring the fact that it will take
time before NPI production cuts start eating into that stocks
Moreover, push things too hard and too fast in this market
and strange things happen.
The most significant outcome of that 2006-2007 rally to over
$50,000 was the commercialisation of a new form of producing
nickel in China. It's called nickel pig iron!
(Editing by David Evans)