Supply cuts to provide the floor for nickel in 2016

Nickel prices were battered in 2015 and were the worst-hit among the base metals complex mainly dragged down by plummeting Chinese demand and absence of anticipated shortage following the Indonesian ban in January 2014.

Stainless steel production accounts for about two-thirds of nickel demand and hence, slowing demand from the stainless steel industry has hurt the silvery-white base metal the most.

The International Stainless Steel Forum showed global production of the alloy dropped in the first nine months of 2015. Demand was not picking up but supply was abundant as dryness linked to the El Nino weather in the Philippines, the world’s top producer of nickel ore, allowed them to mine until year-end instead of typically shutting due to seasonal rains.

On the contrary, the Indonesian government reiterated that the nickel ore ban remains in place as the relaxation of the mining policy would harm its commitment to fully implement the 2009 Mining Law.

However, this could not support the prices much, which were near 12-year lows.

But, of late, the situation seems to improve as the industry reacted to low prices with output cuts.

China, the largest producer, took the lead and nickel smelters there plan to cut output in a bid to shore up prices.

Eight major Chinese nickel producers, including the largest refined metal supplier Jinchuan Group Co. and nickel pig iron maker Tsingshan Holding Group Co agreed to cut output by 15,000 tonnes in December and by at least 20 per cent in 2016.

Following similar moves from Jinchuan Group, Tsingshan Group, Xinjiang Xinxin Mining industry, Inner Mongolia Xinhualian Mining Industry and Jiangsu Baotong Nickel Industry, Jilin Ji’en Nickel, which is Chinese largest nickel salt producer, is expected to reduce nickel metal production by 3,000 tonnes in December, and will cut output by at least 20 per cent in 2016.

In line with these announcements, the International Nickel Study Group (INSG) report stated that the global nickel market should swing into a 23,000-tonne deficit in 2016 from a small surplus of 49,000 tonnes in 2015.

Global output is expected to shrink to 1.942 million tonnes (mt) in 2016 versus 1.954 mt in 2015 and demand is expected to rise to 1.965 mt in 2016 versus 1.905 mt in 2015. Besides, the Philippines supplied more than 90 per cent of the nickel ore imports in China and supply constraints there could be much needed relief for nickel.

Low-grade ore, which makes up for more than 50 per cent of China’s nickel imports, has dropped significantly in 2015.

The condition is not great either for high grade ore since this represents only about 15 per cent of the Philippine’s nickel exports.

Although the impact of supply cuts is yet to be seen, it is likely to be an important booster for prices in combination with tighter supply of nickel ore from the Philippines.

Hence, we expect nickel prices to trend higher from a three-month perspective and LME nickel (last closing: $8,640/tonne) prices can possibly surge towards $8,950 while MCX nickel (CMP: ₹562/kg) may rise towards ₹650.

The writer is Associate Director – Commodities & Currencies Business, Equity Research & Advisory, Angel Commodities Broking Pvt. Ltd. Views are personal.

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