LONDON (Reuters) - China is importing more nickel than ever before.
Headline imports of refined metal hit a new all-time record high of 49,012 tonnes in April.
The cumulative tally of 157,600 tonnes over the first four months of the year represents a 115,000-tonne increase over the same period of last year.
Imports of ferronickel have also surged to 294,700 tonnes so far this year, which is already more than any previous calendar year with the exception of 2015.
Somewhere in this flow of material lies an unfolding bull narrative, one of falling Chinese production and resurgent demand.
The problem is that there is too much else going on in the import data to get a good view of the shifting Chinese nickel landscape.
Graphic on China’s refined nickel imports:
RUSSIAN ROULETTE WHEEL
When it comes to refined nickel, the core driver of rising imports is the flow of Russian metal into China.
Russia’s Norilsk Nickel is one of the world’s largest producers of the metal so has always accounted for some of China’s imports needs in the past.
But the amount of Russian metal entering the country has grown from around 45 percent of total imports in 2012 and 2013 to 72 percent so far this year. In April itself Russian metal accounted for 80 percent of all imports.
The game changer was last year’s decision by the Shanghai Futures Exchange (ShFE) to allow Norilsk brands to be delivered against its new, booming nickel contract.
What has ensued amounts to a wholesale relocation of Russian nickel from the London Metal Exchange (LME) warehouse system to China.
Russian full-plate cathode used to account for just about all of LME stocks but it now represents only 40 percent of the total.
ShFE stocks, meanwhile, have mushroomed to 91,715 tonnes from just 3,100 tonnes this time last year, when the Shanghai contract had only just started trading. The ShFE doesn’t provide a breakdown of its stocks by origin but it’s a fair bet that most of what it holds is in the form of Russian metal.
If Russian imports were running at historical levels of around 120,000 tonnes annualized, imports of refined metal would still be up but by a significantly reduced degree.
INDONESIA THE NEW NPI PRODUCER
Something very similar is happening in terms of inflating the headline figure for ferronickel imports.
The single largest source of imports this year has been Indonesia, which has accounted for 196,400 tonnes, or 67 percent, of the total import picture.
But this material from Indonesia isn’t ferronickel at all but rather nickel pig iron from a new plant operated by China’s Tsingshan.
The price of imported material from Indonesia has averaged $1,041 per ton so far this year, compared with over $2,000 for ferronickel from established producers such as New Caledonia, Brazil and Colombia.
The Tsingshan plant, currently ramping up to 90,000-tonne per year Phase II capacity, is the poster child for Indonesia’s build-out of its own processing capacity after the imposition of a ban on raw materials.
However, the inclusion of this lower-grade material in the ferronickel category of China’s imports is serving to distort the data. If it weren’t there, ferronickel imports would have totaled just 98,000 tonnes, well within historical norms.
ORE IMPORTS FALLING
The only category of nickel import that is in decline is that for nickel ore, the life-blood of China’s own massive nickel pig iron production sector.
Indonesian imports have been non-existent ever since the country imposed its ban on exports of unprocessed minerals at the start of 2014.
The supply gap has been filled in large part by ore from the Philippines, although imports have fallen quite sharply so far this year to 4.16 million tonnes from 6.65 million in the first four months of 2015.
This may in part be seasonal, a consequence of the rainy season in the Philippines which inhibits both mining and shipping, but it may also be partly down to price. The country’s ore producers warned in March of their intention to reduce both production and exports this year.
Either way, it will put further pressure on China’s NPI sector, particularly since stockpiles of Indonesian ore are thought to be running very low.
The latest assessment by analysts at Macquarie Bank is that the Philippines can probably supply enough ore to support Chinese NPI production at a rate of 350,000-400,000 tonnes per year.
That is, by their own admission, above the consensus view but it still marks a contraction for a sector that used to generate over 500,000 tonnes per year.
Indeed, the latest assessment from the International Nickel Study Group (INSG) is that Chinese nickel production slid by almost 18 percent in the first quarter of this year.
Demand for nickel units from China’s stainless steel sector is, meanwhile, proving much stronger than expected.
That’s a reflection of the broader return to growth of China’s steel production sector but also of a shift toward production of the nickel-rich 300-series of stainless steel products.
Macquarie has just upgraded its global nickel demand growth forecast for this year from 1.3 percent to 4.4 percent, largely on the back of expected 4.0 percent growth in Chinese 300-series stainless production.
STOCKS SHIFT MASKS MARKET SHIFT
The more bullish picture starting to emerge in China is all part and parcel of the broader global shift from a state of chronic supply surplus to one of growing shortfall.
The last year that the nickel market was in deficit was in 2011, according to the INSG.
But the Group estimates a small 600-tonne deficit in the first quarter of this year, largely thanks to an 8,200-tonne shortfall in March itself.
These are still highly marginal numbers relative to the size of stocks in the nickel market, which is why nickel’s is a slow-burn bull story.
But the market is showing every sign of shifting to supply-demand deficit, even if it’s difficult to discern right now because of the mass movement of inventory from west to east.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Editing by William Hardy
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