LONDON (Reuters) - Nickel was the obvious stand-out in China’s February metals trade figures.
Against a backdrop of muted import demand from the world’s top metals consumer, refined nickel imports hit a seven-month high. Imports of ferronickel continue to run strong, while ore imports are slumping.
All of which suggests that supply stresses in China’s giant nickel pig iron (NPI) sector are accumulating.
The sector’s ability to survive without Indonesian ore after that country banned exports at the start of last year lies at the heart of the bull case for higher nickel prices.
The bulls got badly burnt last year, a supercharged rally going into reverse as Philippine ore supply surged to fill the Indonesian gap, providing China’s NPI producers with a critical lifeline.
That, though, the bulls argue, has simply delayed the inevitable depletion of nickel ore stocks and the resulting decline in NPI production. At some point China will return in a big way to the import market, pushing the global market into supply deficit.
The bull case is starting to look more concrete on the basis of China’s nickel trade flows so far this year.
The only problem, however, is that the demand side of the picture is now starting to look decidedly shaky.
China’s nickel ore imports slumped below 1 million tonnes in February for the first time since February 2010.
Cumulative imports over the first two months of this year totaled just 2.1 million tonnes, down from 10.8 million tonnes over the same period of last year.
Indonesian imports have totally evaporated, testifying to the efficiency of the country’s ban on exports of unprocessed minerals.
Imports from the Philippines, meanwhile, are also running at reduced levels, reflecting the impact on both production and shipments of the country’s rainy season, which runs from November to February in any year.
At 2.0 million tonnes, imports of Philippine ore so far this year are slightly higher than last year but, quite evidently, still nowhere near enough to offset the loss of Indonesian supply.
The inference is that China’s NPI producers are burning through their accumulated ore stocks.
Jim Lennon, analyst at Macquarie Bank, estimates that ore stocks have fallen to around 6-8 million tonnes from 20 million this time last year.
Speaking in the Reuters Base Metals Forum, he suggested that high-grade stocks could effectively be depleted by the middle of this year. That would leave only lower-grade Philippine material, which has significant cost implications for NPI producers, many of whom are already struggling to stay above water at current prices.
Increased supply stress within China’s own production base should translate into higher import demand.
And that does seem to be happening.
Right now, that increased import appetite is primarily manifesting itself in the ferronickel part of the supply chain.
Net imports of this form of nickel surged by 40 percent last year and were up again by 47 percent in the first two months of 2015.
But imports of refined metal also seem to be recovering from the mass destock occasioned by the Qingdao port scandal, which erupted around the middle of last year.
The scandal, centered on the multiple pledging of metal against loans in China’s shadow credit market, caused a wholesale flight of nickel out of the country to safer storage in London Metal Exchange warehouses.
China consequently turned net exporter of refined nickel for the first time in at least a decade.
That export surge has now abated. January’s tally of 3,570 tonnes represented a one-year low.
Imports, meanwhile, recovered to 10,500 tonnes and net imports of 6,900 tonnes were the highest monthly count since April of last year.
The Qingdao effect, in other words, seems to be abating with refined nickel flows reverting to historical norms.
These are still slow-burn trends and everyone is waiting to see how much ore flows from the Philippines after the rainy season.
Philippine supply is still trending higher but it can only mitigate, not reverse, the loss of feed constraining China’s NPI sector.
Macquarie’s Lennon estimates that NPI production is running at an annualized 400,000 tonnes per year nickel contained, compared with run-rates of around 500,000 tonnes over the last couple of years.
That’s partly due to accumulating financial stresses and partly down to the closure of some NPI plants in Shandong on environmental grounds.
One part of the bull picture, however, is still missing.
There seems to be no tangible tightness in the NPI market within China, either in terms of availability or price.
That’s down to demand.
Global demand for nickel from the stainless steel sector “crashed and burned” in the last quarter of 2014, according to Lennon, as stainless producers destocked in response to lower nickel prices. China’s huge stainless industry was no exception.
But there are two specific areas for concern about Chinese stainless output going forward.
China’s stainless steel demand is suffering from the same macro pressures as other industrial commodities as the country’s spectacular growth story stutters.
But overlaying that broader slowdown are specific questions about the sustainability of Chinese exports.
China exported a massive 3.85 million tonnes of stainless last year, a flood that is now provoking countermeasures.
The European Union on Wednesday unveiled punitive duties on imports of stainless steel cold rolled sheet from China and Taiwan.
It’s a major blow for China’s stainless producers, which have lifted exports to compensate for slowing demand growth in the domestic market.
The full implications are still uncertain but it’s clear this is not good news for Chinese stainless production nor for nickel demand in the country.
Which is ironic timing, given that the country’s trade patterns suggest the Chinese supply part of the bull argument for nickel is starting to take concrete form.
The case for higher nickel prices was always going to be a matter of timing as the market discovered to its cost last year with that premature rally.
And as the focus shifts from Chinese supply to Chinese demand, the timeline may be lengthening again, however bullish the signals from the country’s nickel imports.
Editing by Dale Hudson