Column: Nickel faces huge supply glut as Indonesian output booms
LONDON, April 27 (Reuters) - The nickel market is facing a massive supply glut this year as surging Indonesian production continues to outpace global demand.
The International Nickel Study Group (INSG) is forecasting a supply-demand surplus of 239,000 tonnes, the largest in at least a decade and a significant increase from last year's excess of 105,000 tonnes.
It also represents a lift from the Group's last assessment in October, when it expected a surplus of 171,000 tonnes for this year.
Demand expectations have been tempered, although nickel usage is on track to register healthy 6.1% growth in 2023. It still won't be enough to absorb the wave of new production coming out of Indonesia.
The supply surge, though, is not coming in the form of the Class I refined metal traded on both the London Metal Exchange (LME) and the Shanghai Futures Exchange.
That may complicate the pricing impact.
The INSG estimates global nickel usage rose by 6.3% last year and forecasts it will almost match that rate this year.
It's a resilient performance given that stainless steel is still the largest component of nickel usage and output of the alloy fell by 5.2% last year, according to the World Stainless Association.
Stainless meltshop production fell everywhere, even in China, the world's largest producer, which registered a 2% year-on-year decline.
Chinese production started recovering in the fourth quarter as the country emerged from zero-Covid restrictions but any positive impact was offset by sharp drops in European and U.S. run-rates in line with slowing economic activity.
The INSG expects only "mild growth" in the stainless sector this year.
Taking up the slack from a weak stainless sector is demand for nickel from the electric vehicle (EV) battery sector.
Despite weak Chinese sales after the removal of subsidies and the shift towards non-nickel chemistries, the speed and scale of the global switch to EVs means that batteries are the core driver of growing nickel demand.
A total 17,137 tonnes of nickel were deployed onto roads globally in EV batteries in February, according to research house Adamas Intelligence. That was up 19% month-on-month and 47% up on February last year.
INDONESIA RAMPS UP
The coming surplus, however, will not be defined by demand but by production, particularly Indonesian production
The country's nickel mine output grew by 48% to 1.58 million tonnes in 2022 and by another 44% in the first two months of this year, according to the INSG's most recently monthly bulletin.
Since Indonesia fully banned the export of ore in 2020, all that mine output is now being converted to nickel products.
Some of the new processing capacity is producing nickel pig iron for the stainless sector and Indonesia's growth will come at the expense of lower Chinese output as the off-shoring trend continues.
Much of the new production, however, is targeted at the fast-growing battery sector with operators experimenting with new technology to cross the processing hurdle of converting Indonesia's relatively low-grade laterite resources into a form that can be used in lithium-ion batteries.
This changes the nature of this particular nickel surplus.
"Historically, market surpluses have been linked to LME deliverable/class I nickel, but in 2023 the surplus will be mainly due to class II and nickel chemicals (principally nickel sulphate)," the INSG said.
The rapid growth of nickel in non-exchange deliverable form has widened the pricing gap with the LME benchmark and indeed played a significant part in the blow-out of the LME nickel contract in March last year.
The split between the different segments of the market is clear to see on both London and Shanghai exchanges.
LME stocks of Class I nickel continue to slide even as surplus builds in other parts of the supply chain. Registered inventory has fallen by 28% so far this year to 40,032 tonnes, the lowest level since 2007.
Shanghai registered stocks are lower still at just 1,496 tonnes as China's imports of refined metal are increasingly replaced with intermediate products heading for the EV sector.
Pricing on both exchanges is capturing this Class I dynamic, the LME three-month price last week hitting a two-month high of $25,950 per tonne. It has eased to a current $23,700 but is now being supported by a tightening in the spread structure.
The contango across the benchmark cash-to-three-months spread has contracted from over $200 per tonne earlier this month to $12 as of Wednesday's closing evaluations.
As Indonesian operators close the processing gap between Class I and II forms of nickel, the split in pricing should in theory start closing as well.
But it's not happened yet.
The INSG's latest forecast is clearly bearish for the nickel price but how bearish for the price of exchange-traded refined metal remains to be seen.
The opinions expressed here are those of the author, a columnist for Reuters.
Our Standards: The Thomson Reuters Trust Principles.
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