(The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, Feb 10 (Reuters) - Good things, they say, come to those that wait.
Just ask a nickel bull.
The nickel market went on a super-charged rally over the first half of last year, the benchmark London Metal Exchange (LME) three-month price racing up from below $15,000 per tonne to a May high of $21,625.
The trigger was the well-flagged but widely unexpected decision by the Indonesian government to ban the export of unprocessed minerals in January. At the stroke of a presidential pen, China’s massive nickel pig iron (NPI) sector lost its main source of feed.
Great expectations, however, were dashed by reality, specifically a compensatory surge in nickel ore supply from the Philippines.
The subsequent price collapse was as spectacular as the original rally. And here we are again, the London nickel market kicking its heels around the $15,000 level.
But the bull story hasn’t gone away. It has merely been postponed. Nickel is still metal analysts’ favoured upside pick over a two-year time horizon.
So, will this be nickel’s year (again)?
Possibly, but there are many moving parts to this bull story and at its core lies one of the least transparent parts of the global industry.
One thing is for certain. The Indonesian authorities haven’t changed their minds and there has been no lifting of the ban on exports of nickel ore to China.
Flows of material between the two countries have disappeared, bar the odd shipment of what is probably nickel-rich iron ore.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's imports of ore from Indonesia and the Philippines: link.reuters.com/wer93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Indonesian production has also shrunk dramatically. The International Nickel Study Group estimates mine production was just 170,000 tonnes in the first 11 months of 2014, compared with 730,000 tonnes in the same period of 2013.
China’s NPI producers have so far survived this drought much better than expected.
It was widely known they had built up significant quantities of stocks prior to the January 2014 ban and that the Philippines could generate some offset for the lost Indonesian production.
But the scale of that offset caught the market by surprise, as did NPI producers’ ability to blend Philippine ore with higher-grade Indonesian material as a way of eking out their stocks.
The current consensus is that such thrifting is merely delaying the inevitable. But by how long?
It’s all a matter of dirt, because to the untrained metallurgist eye, ore is just that. Even “high-grade” ore from Indonesia contains just 1.7-1.8 percent nickel. Medium-grade ore averages around 1.5 percent and low-grade ore is more iron ore than nickel.
Put simply, Philippine ore tends to be dirtier than Indonesian ore but the devil is in the dirty detail, particularly when it comes to blending.
The time-line for NPI producers to run out of the right sort of dirt is therefore necessarily hazy.
Some time around the second quarter of this year, according to Nikhil Shah, nickel analyst at CRU, speaking in Reuters Base Metals Forum last week.
Give or take a quarter.
But at some stage, there must be some impact on NPI production rates.
Assessing the scale and timing of that impact is, however, a trickier thing.
China’s NPI sector is highly fragmented. The technology is relatively new and continuously evolving.
No-one is even really sure how much China produces. Around 480,000 tonnes last year, according to CRU. Give or take a few tens of thousands of tonnes.
The cost structure of the industry is even more uncertain, defined by the differences between older blast furnace and newer rotary kiln methods of production and between stand-alone operators and those integrated with stainless steel mills.
Some production may already have been shuttered. More will almost certainly close over the course of this year as nickel ore supply both dwindles and becomes more expensive.
This, of course, is what was supposed to happen last year. But, basis the diminishing stocks of higher-grade dirt, it really should start happening this year.
At some stage.
CRU forecasts output will decline to around 350,000 tonnes in 2015, although Shah cautioned that “it could be higher if there is more ore from the Philippines.”
Declining NPI production should logically mean a boost to China’s imports of nickel.
This is the key component of the bull story.
But there is the complication of what form those imports will take.
Some may actually be in the form of nickel pig iron from Indonesia. That country’s ban on minerals exports was explicitly intended to force its mining sector down the value-add chain with Chinese NPI producers particularly incentivised to build NPI plants in Indonesia.
And some of them are doing so, although not nearly as many or as fast as the Indonesia authorities probably expected.
But that doesn’t automatically translate into a surge in imports of refined nickel, since Chinese stainless steels may well favour other forms of nickel such as ferronickel.
Indeed, Chinese imports of ferronickel have already been trending sharply higher, up 45 percent last year.
New suppliers have emerged. Imports from Myanmar have mushroomed, reflecting the start-up of a new plant built with the backing of one of China’s top stainless steel producers, Taiyuan Iron and Steel.
Which is probably not what Indonesia’s authorities intended when they cut off ore supplies to China.
Still, even factoring in other forms of nickel, there should be some feed-through, albeit of uncertain intensity, to the refined nickel segment of the market.
The question then arises as to when an increase in China’s import appetite causes the rise in visible inventory on the LME to stop and reverse.
Because another key reason for nickel’s crash and burn over the second part of 2014 was the sheer scale of build in LME inventories.
That in part reflects the reverse flow of metal out of China’s bonded warehouses towards safer-haven LME storage in the wake of the Qingdao port scandal.
But it is also because the refined nickel market is still in supply surplus, even if the size of that surplus does seem to be diminishing.
LME stocks are still recording fresh record highs on an almost weekly basis, 426,324 tonnes this week.
As they do, the cushion against falling NPI production in China and any resulting need for greater imports is also steadily inflating.
None of which is to deny the core factual basis of nickel’s bull story. The world has still lost a significant part of its mine supply. At some stage that must translate into higher prices.
But as this market found out last year, timing is everything. And timing is dependent on the complex interplay of dirt grades and cost opacity in China, new supply dynamics in Indonesia and elsewhere and the evolution of LME stocks.
Oh, and demand of course.
If you can work out how all those moving parts fit together, you’ll be a successful nickel trader this year. Good luck!
Editing by David Evans