(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, May 9 (Reuters) - Nickel’s bull run has just gone into overdrive. On the London Metal Exchange (LME) three-month metal has gained almost $1,900 per tonne in the space of a couple of days, this morning hitting a 26-month high of $20,500.
Behind the latest turbo-charged surge is news that Brazilian producer Vale’s Goro operations in New Caledonia have been suspended after an effluent spill.
This in itself says much both about the febrile state of this over-heating market and about the shift in collective mindset that has followed the Indonesian ban on nickel ore.
After all, accidents and suspensions have dogged Goro since Vale first flicked the on-switch back in 2011.
The project has become totemic of the problems associated with high pressure acid leaching (HPAL), a relatively new technology developed to treat laterite nickel deposits.
Goro was out of action for most of the second half of 2012 due to problems with the acid plant. It was out of action again for six weeks in the fourth quarter of 2013 after what Vale called “a failure of its effluent placement and dispersion line”.
Designed to produce 58,000 tonnes per year of nickel oxide, Goro has in fact generated just 26,000 tonnes of finished product in almost three years of operation.
True, Vale could boast that first-quarter production of 5,600 tonnes of intermediate product “was on par with its best performance to date” but, given Goro’s history, this was always likely to be tempting fate.
So too was the company’s confident prediction back in November that Goro would lift production to 40,000 tonnes this year.
Reality has fallen woefully short of Vale’s production guidance in each of the last couple of years, so that ambitious target said more about the company’s admirable commitment to making Goro work than the likely production outcome.
Another suspension at an operation that has spent as much time down as it has up doesn’t really justify a near $2,000 price spike.
But that’s the point.
The Goro news represents no more than another bit of fuel to throw on what is a raging fire of a market.
It is a fundamental fig-leaf to “explain” a rally that is now feeding on its own momentum.
Hot investment money is flowing into the nickel market at a rate not seen in the base metals markets for many years.
LME market open interest has mushroomed to a record high of 310,350 lots from 230,000 lots at the start of the year.
What’s going on in the nickel options market is even more dramatic.
April volumes of almost 143,000 lots were not only a fresh monthly high but were around half of what traded over the entire course of 2013. Even that may understate the real level of interest, if there are bigger positions submerged in the over-the-counter part of the market.
Punters have been snapping up call options, which give the right to buy, at strikes up to $30,000. The sellers of those options have to buy to hedge their exposure as the market punches higher, their own actions of course acting as a further price accelerator.
Be warned that if the price corrects sharply, as it surely will at some stage, hedge-selling of options cover will accelerate any retracement, the sort of whip-saw action that every options dealer most fears.
Take a step back from the current heat emanating from the nickel market, however, and Goro is symptomatic of a bigger change in collective mind-set.
It is just one of several big new projects now entering production.
Until a few months ago, such projects, many of them initiated during nickel’s previous price boom in 2006-2007, were viewed through a bear prism.
They promised more supply in an already hugely oversupplied market. Analysts tracked their often painfully slow start-ups to calibrate the scale of that surplus.
From now on, though, they will be viewed through a bull prism, each set-back another reason to believe in higher prices.
The collective volte-face is down to the Indonesian ore ban, which has transformed the global nickel supply landscape, removing in one fell stroke almost a third of the world’s mine production.
The impact of the January ban is now roiling all parts of the physical nickel market, not least in China, where the ban puts at risks the country’s huge nickel pig iron sector.
Nickel seems set to move from supply feast to supply famine in unprecedentedly quick time.
As long as the Indonesian authorities stick with their ban, and there is no indication that they won‘t, there is a realisation that these new projects will now be needed to fill the gap.
And it’s not just Goro and not just the HPAL technology that is problematic right now.
Indeed, the Ambatovy project in Madagascar, which is probably the closest to Goro in terms of technology, scope and straight-to-metal ambition, officially declared commercial production in January.
Ambatovy has had its fair share of start-up glitches but its relatively smooth ramp-up leaves a major question-mark as to whether Goro’s woes are site-specific rather than HPAL-generic.
Moreover, other producers are struggling with projects using more conventional technology to produce ferronickel.
Glencore’s giant Koniambo project, also in New Caledonia, produced just 1,000 tonnes in the first quarter because of “various factors including power availability/stability and an extended maintenance stoppage in March 2014”. Glencore warned in its Q1 report that it is now reassessing its production guidance for this year.
Vale’s Onca Puma ferronickel project in Brazil is only now ramping up again after a full year outage caused by a furnace blow-out.
Anglo American’s Barro Alto project in the same country is now in its third year of operation but will require a complete furnace rebuild before it can reach its full capacity in 2016.
Where once such production losses mitigated surplus, they are now perceived to be adding to future deficit, promising more bullish fuel to the nickel fire with each quarterly reporting season.
The real significance of the Goro news is not what the latest set-back says about a project plagued by set-backs but what it says about the market’s rampant animal spirits, where every bit of news is an excuse to push higher. (Editing by Susan Thomas)