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Commodities

Norilsk's 1942 nickel plant gone but far from forgotten: Andy Home

LONDON (Reuters) - Norilsk Nickel, or Nornik as it has just rebranded itself, has just completed the decommissioning of the nickel refining plant in its far-flung Polar operations in the Arctic north of Siberia.

Molten nickel is poured at Nadezhda Metallurgical Plant of the Norilsk Nickel company in the Arctic city of Norilsk January 23, 2015. REUTERS/Polina Devitt

It was known as the 1942 Plant because that’s when it was first commissioned and it has been operating ever since.

The closure is part of a radical overhaul of the company’s nickel operations, with refining operations being refocused on the metallurgical complex on the Kola Peninsula in the west of Russia and the Harjavalta refining complex in Finland.

It is decidedly good news for the inhabitants of the city of Norilsk itself.

Located with Soviet practicality within the residential confines of the city, the plant emitted 380,000 tonnes of sulphur dioxide every year, representing around 25 percent of total sulphur emissions in the city.

Its removal marks a major leap forward in Nornik’s program of improving its environmental record, back in the news with reports of rivers turning the color of blood due to metallic contamination.

But the removal of this legacy plant leaves an interesting legacy for the global trade in nickel, much of which is predicated on stocks of “Norilsk Combine H-1” and “Norilsk Combine H1-Y”, the two brands produced by the 1942 Plant.

MONSTER

The 1942 Plant was a monster, producing around 120,000 tonnes per year of refined nickel.

That’s twice as much as either BHP Billiton’s Nickel West complex in Australia or Vale’s Sudbury operations in Canada.

Based on International Nickel Study Group figures, it accounted for just over six percent of global refined nickel production in 2014, the last year of full operations before the winding-down process started.

But its significance in terms of global nickel trading was more than just about its huge output.

It was a major source of full-plate nickel cathode. This form of the alloying metal is not particularly favored by industrial users because most have to cut it into more manageable size before transforming it into an intermediate product.

In the years following the demise of the Soviet Union and the subsequent flow of Norilsk material into the Western market-place, Russian full-plate cathode therefore became one of the most traded and stored forms of nickel.

It represents much of the nickel market’s global inventory as well as acting as the stocks bedrock of the London Metal Exchange’s (LME) nickel contract and, more recently, of the Shanghai Future Exchange’s (ShFE) contract.

Its closure won’t affect Nornik’s own production profile. The company will simply redirect raw material flows through its other refining operations.

But it does pose a headache for the two exchanges and nickel traders.

LME HOLDS FIRE

That’s because it’s normal practice for the LME to delist specific brands of metal if the source plant ceases production.

That’s a problem when those brands constitute a significant part of the exchange’s own registered stocks.

Norilsk metal, and specifically Norilsk full-plate cathode, has historically accounted for much of the LME’s stocks base.

For example, at the end of March 2015, the close of the exchange’s warehousing year, over half of LME stocks were classified as originating from Eastern Europe or the former Soviet Union.

The LME doesn’t specify tonnages by specific brand, so it’s possible that some of that total came from Nornik’s Kola operations but it’s certain that there was a lot of metal from the 1942 Plant there as well.

But the ramifications of an LME listing, or possible de-listing, extend much wider than simply what is already in the exchange’s warehousing system.

An LME listing confers a special status on otherwise generic metal. The ability to deliver a registered brand into exchange warehouses provides a comfort zone for traders, stockists and the banks that finance the physical trade in metal.

Which is why the exchange has held fire on its normal 90-day delisting rule for legacy brands “due to the significant off-warrant stocks of these brands, and in particular the size of such stocks in comparison to total warranted nickel stocks.”

The LME, it added in a notice to members dated Aug. 26, 2016, “will continue to keep this situation under review, and intends eventually to proceed to delisting when it considers this may be achieved in an orderly manner.”

Don’t necessarily hold your breath.

SHANGHAI FLOW

When the LME next releases its annual report on stocks by origin country, covering the end of the most recent year to March 2016, the Russian component will have shrunk.

Over the last 12 months there’s been a mass movement of full-plate metal out of LME sheds.

Full-plate metal typically accounted for well over 90 percent of LME stocks until as recently as 2012.

The ratio has been declining ever since.

In part this has been down to the oversupplied nature of the nickel market with other producers of different forms of nickel such as briquettes shipping metal to the “market of last resort”.

But the process has accelerated sharply over the last year or so to the point that full-plate currently accounts for less than 40 percent.

That’s because so much has been taken out of LME sheds and shipped to China, where it has formed the inventory underpinning of the ShFE’s new nickel contract.

Launched in April 2015 the contract has exploded onto the global nickel trading scene.

Such was the immediate surge in volumes and open interest the ShFE realized very early on that its deliverable brand list, all denoting Chinese metal, was simply not going to be sufficient to support the contract.

So it added Nornik brands, including “Norilsk Combine H1”, since when some 350,000 tonnes of Russian-origin metal have entered the country and ShFE registered stocks have mushroomed to over 110,000 tonnes.

And those figures imply that, as with the LME good-delivery brand status, there may be much more metal sitting off-market under finance arrangements predicated on the ability to deliver metal if necessary to ShFE warehouses.

GONE BUT NOT FORGOTTEN

Nornik noted in its closure announcement that it had held talks with the LME about deferring any delisting and that “similar talks with the ShFE have been scheduled in September 2016.”

The truth is that there is simply too much 1942 Plant metal sitting around the world for an LME or ShFE delisting to take place without creating market disorder.

So farewell Plant 1942.

You may be gone but you’re not going to be forgotten for a long time yet.

Editing by Louise Heavens

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