LONDON (Reuters) - The knives may be out for the nickel market.
Stainless steel knives specifically, together with stainless steel forks and spoons.
COVID-19 has hit just about every aspect of the global economy but the hospitality business is one of the worst affected.
A wave of restaurant closures in the developed world would generate a surge of unwanted cutlery. If 20% of restaurants closed, it would translate to around 80,000 tonnes of stainless steel scrap containing 24,000 tonnes of nickel, according to analysts at Citi.
That’s the equivalent of a medium-sized production plant such as Glencore’s Koniambo facility in New Caledonia.
Citi’s calculation is based on the fact that kitchenware is still one of the main drivers of stainless steel consumption. And stainless steel remains the key driver of nickel demand despite the future promise of usage in lithium-ion batteries.
The focus on what happens to the restaurant sector in a post-coronavirus world is symptomatic of a shift in nickel market narrative from supply to demand disruption.
The title of Citi’s research note, “Nickel’s unfavorable end-use demand outlook” (May 27, 2020), tells you the bank isn’t that enthusiastic about the metal’s prospects.
SUPPLY DISRUPTION FADES
London Metal Exchange (LME) nickel collapsed from more than $14,000 per tonne at the start of January to a coronavirus-induced low of $10,865 in March.
It has since recovered to a current $12,780, part of a broader bounce-back in the industrial metals complex thanks to massive government stimulus and optimism about China, the world’s biggest metals user.
Supply-side disruption due to lockdowns has played its part with several major nickel producers curtailing or closing operations over March and April.
However, as lockdowns ease, supply chains are normalising. The largest ongoing outage is at Sumitomo’s Ambatovy operations in Madagascar.
Nickel mining in the Philippines was largely halted during March and April but major exporters of ore to China have since been allowed to resume shipments.
Indonesia, the emerging powerhouse of global nickel production, was among the countries least affected by quarantine measures.
China’s imports of ferronickel are booming, up 93% at 1.04 million tonnes in the first four months of this year. A significant part of that is rising supply of nickel pig iron from Indonesia’s expanding processing sector.
The International Nickel Study Group (INSG) estimates that global mined nickel production fell by almost 5% in the first quarter of this year due to a combination of lockdowns and low prices.
Nickel usage, however, slumped by more than 11%, leaving a refined nickel overhang of 46,000 tonnes in January-March.
These are still preliminary estimates subject to revision but the emerging picture is clear.
The global nickel market is set to record its first surplus since 2015. Just how big a surplus is going to depend on what happens in the stainless steel sector.
STAINLESS BATTLE IN CHINA
The hospitality business isn’t nickel’s only stainless steel problem.
Other key stainless end-users are in the aerospace and oil and gas industries, both of which are also expected to experience a drawn-out recovery.
The three sectors between them account for around 23% of total nickel end-usage and prolonged weakness will feed into a 15% fall in demand this year with the disruption rolling into next year, according to Citi.
The bank wraps its gloomy demand prognosis into a forecast that nickel could be set for “three years of large surplus and a considerable stock overhang.”
That surplus may manifest itself in the form of more nickel or more stainless steel.
The outcome hinges on the battle for market share among producers in China, the world’s largest stainless producer.
China’s stainless steel output last year grew by 10% to 29.4 million tonnes, 56% of global production, according to the International Stainless Steel Forum.
As Chinese production climbs from its Q1 lockdown lows, stainless steel producer margins are under pressure. That should in theory force operators to rein in growth to match output with demand.
But they might not, Citi argues. Larger low-cost producers might carry on churning out the alloy with the aim of forcing higher-cost operators out of the market.
In which case the nickel surplus will largely take the form of a stainless steel surplus.
The key word, though, is “surplus”.
LONG-DATED EV STORY
What, though, of the electric vehicle sector, the source of much bullish excitement in the nickel market?
Right now direct nickel usage in battery manufacture is still too low to move the stainless-weighted dial. Global nickel deployment in passenger vehicles totalled just under 3,000 tonnes in April, according to Adamas Intelligence (“EV Battery Nickel Monthly).
That compares with average global nickel usage of 178,000 tonnes per month in the first quarter, using INSG estimates.
If future EV use is tangible in the nickel market, it is in the form of long-dated hedging on the LME contract.
Citi notes a significant build in open interest beyond the front 12 months of the contract with more positioning likely taking place in the over-the-counter shadows.
Such long-dated buying has helped support nickel at the price lows and it will continue to be an important, albeit opaque, price driver.
“It is highly unlikely in our view that we have already seen much of the 1.1 million tonnes of the next five years nickel cumulative EV consumption forward hedged”, according to Citi.
Nickel’s EV narrative, in other words, remains on track but it is not going to offset short-term weakness in the stainless steel sector.
If nickel bulls want to help the market right now, they could do worse than treat themselves to an evening out at their local restaurant.
Assuming it’s reopened after lockdown.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Kirsten Donovan
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