Vale Indonesia's nickel processing facility in Sorowako, South Sulawesi. (GA Photo/Mohammad Defrizal)

Nickel Flies on Supply Hits; Indonesia Could Ground It


FEBRUARY 18, 2018

London. Nickel has enjoyed a blistering start to 2018.

On the London Metal Exchange (LME) three-month nickel has this week punched up through the $14,000 level for the first time since May 2015 to hit a Thursday high of $14,420 per ton.

It has gained 10 percent since the start of the year and has bounced 34 percent from its December low of $10,740 per ton.

Speculative money has poured into this hot market, fund managers tripling their net long exposure to the London contract over the course of December and January.

Shanghai investors have been equally enthusiastic, albeit with a Chinese twist of treating nickel as a bullish steel rebar derivative.

Nickel is basking in the electric vehicle glow but the full demand impact is still in the future.

Right now, rather, this is a good old-fashioned commodity story of strong demand from the global stainless sector, falling stocks and supply hits, both expected and unexpected.

Indonesia, however, is waiting in the wings.

Four years after the country upended the nickel market with its ban on exports of ore, it is set to return to the world stage, bigger and more integrated than ever before.

Supply Hits

Brazil's Vale kick-started this rally with a Dec. 6 announcement it was cutting production by 15 percent, or 45,000 tons, in 2018 to "preserve its nickel optionality."

It was a reminder of just how low nickel prices have fallen in the last couple of years but a welcome, if belated, sign of industry leadership.

If Vale lit the fire, extra fuel came from one of those totally unforeseen incidents that plague commodity forecasting.

A tropical cyclone swept across the island of Madagascar early January, causing damage to the Ambatovy nickel operations.

Production was halted and is only now ramping up again. Slowly.

Sumitomo, now the largest shareholder in the joint venture after a restructuring late last year, said it expects the plant to run at an average 50 percent utilization this quarter. Production of refined nickel will fall from 40,500 tons to 33,400 tons in the year to March.

Chinese supply, meanwhile, has also taken a double hit.

Nickel pig iron (NPI) producers in Shandong province were among the industrial sectors required to reduce operating rates for the winter heating season running from mid-November through mid-March.

Unexpected disruption came in the form of a Dec. 31 fire at Jinchuan Group's giant 135,000-ton-per year smelter.

The affected 30,000 tons of capacity will take around three months to rebuild, although there is potential offset from other parts of the plant, reported Shanghai Metals Market.

These supply hits, both planned and unplanned, both Western and Chinese, seem to be feeding draws on LME inventory.

LME nickel stocks are "noisy" with much two-way traffic at locations such as Johor but the net outcome last year was a minimal decline of 5,454 tons.

So far this year the clear trend has been downwards with a 27,654-ton, 7.6-percent fall.

Indonesia Ramps Up 

Set against such supply cuts is the return of Indonesia as a major producer and exporter of nickel.

Indonesia banned the export of all unprocessed minerals, including nickel ore, at the start of 2014. The aim was to force the creation of a value-added processing industry.

Those plans are now starting to bear fruit and the Indonesian government is rewarding investors with a relaxation on the export rules.

After a three-year hiatus flows of Indonesian ore to China started showing up in the Chinese trade figures from April last year. Total imports were 3.8 million tons bulk weight through December.

More will follow.

The Indonesian authorities have issued permits for 20.4 million tons of exports through October this year.

One producer alone, Aneka Tambang, is planning to ship 3.9 million tons this year.

The result, according to analysts at Wood Mackenzie, will be to boost Chinese output of NPI, the intermediate product between ore and stainless steel on the nickel process flow-chart.

Chinese NPI production this year is expected to match the previous 2013-2014 peak of 480,000-500,000 tons.

This, however, is no longer just a China story.

Most of those receiving their export permits are companies that have built out NPI capacity in Indonesia itself.

Flows to China of Indonesian intermediate nickel, some ferronickel but mostly NPI, totalled 989,000 tons last year.

Wood Mackenzie expects Indonesia's own NPI production to hit 220,000 tons this year as ever more plants make it into production.

Underpinning this domestic industrial build-out will be a 50-percent lift in Indonesian nickel mine production, according to Wood Mackenzie.

If that sounds a fast rate of growth, consider the assessment by the International Nickel Study Group that Indonesian output grew by 85 percent to 325,000 tons in the first 11 months of 2017.

The total in 2013, the year before the ban, was 834,000 tons.

Indonesia was the world's largest nickel miner before 2014 and it looks set to resume its place this year.

Supply Chain Disruption

At least, bulls might argue, the Indonesian-China NPI axis keeps this supply surge partly quarantined from the rest of the market, particularly the metallic part traded on the LME.

That might be to underestimate the scale of what is happening in Indonesia.

China's stainless giant Tsingshan was an early investor in NPI capacity but it has now constructed an integrated stainless steel plant, ramping up to three million tons per year by the end of 2018.

It has already signed a sales contract to ship stainless slabs to US producer Allegheny Technologies as part of a broader joint venture agreement.

If the tie-up gets the nod from US regulators, nickel ore will be directly entering the non-Chinese stainless supply chain in the form of stainless steel semis.

Might Indonesian NPI also start being diverted from China to impact the equivalent ferronickel part of the supply chain in the West? Might it displace Chinese output, which is then exported, a distinct possibility after China dropped a 20-percent export tax last year?

Wood Mackenzie's view is that such disruption is still a year or two away but that "ferronickel pricing might face competition in the spot market from test parcels of Indonesian NPI" this year.

The Indonesian ban and China's response to off-shore parts of its own nickel-stainless supply chain is already starting to have profound consequences on the nickel market.

The clearest one to see right now is resurgent production. Nickel bulls might want to enjoy the ride while it lasts.