Nickel: From surplus to deficit

The world nickel market has been characterised by oversupply for a protracted period of time. But there are indications that the market could be turning; 2014 will likely witness tightening of supplies with moderating production and rising consumption.

With production projected to trail consumption in 2015, the market is likely to get into deficit for the first time in many years.

Although, around the world output at new mines has been rising, expansion of Chinese nickel pig iron (NPI) output has been the main driver of nickel supply. Huge investment in new low-cost rotary kiln electric furnaces in China has fundamentally altered the nickel cost curve, driving prices below the point at which many existing nickel producers break even.

The rest of the global nickel industry, now caught up in the long-term investments made in the wake of the 2007 price boom, is struggling to compete with the new reality of low-cost NPI output.

The positive correlation between stainless steel production and nickel consumption is well known. Although NPI has been used almost exclusively by the Chinese stainless steel industry, derived from low-grade nickel ore from Indonesia and the Philippines, new NPI smelters in Indonesia will enable stainless steel producers elsewhere in the world to benefit from Indonesian NPI. This could mean a structural shift in the global stainless steel industry.

New investment projects continue to forge ahead with the hope of reducing their average cost of production by expanding output.

Continued excess supply appears likely to maintain downward pressure on prices until producers cut back output or new projects are either delayed or abandoned. Improvement in the global economy should, of course, offer some support to the metal. Considering NPI and new mine output, nickel supplies in the 2013-15 period are expected to be moderate compared to the previous three years.

Demand for nickel remains robust. Stainless steel accounts for two-thirds of demand for nickel. With economic growth set to accelerate gradually, stainless steel production is likely to improve.

In particular, China’s push towards higher value-added products and improved energy efficiency of output will support strong growth in demand for stainless steel with concomitant effect on nickel. One area of new technology in which nickel plays a significant role is the liquefaction, storage and transportation of LNG.

Japanese importers use 7 per cent nickel steel as the new standard for cryogenic LNG storage tanks since this maximises fracture toughness in a low-temperature environment. This offers a new source of demand for nickel.

In India, demand for nickel stands boosted following deregulation of its imports.

After growing 16 per cent in 2012, demand slowed slightly the following year.

In 2014 and 2015, demand is likely to stay in double digits after which, over time, growth rate should slip back towards the rate of India’s GDP growth.

Given the existing circumstances of continued excess supply, combined with the ban on nickel ore exports from Indonesia, it is tough to forecast the price movements accurately.

Indonesia is the world’s biggest exporter of nickel ore. The export ban has so far failed to catalyse a significant price traction.

The downward pressure on nickel prices is likely to be maintained. Over the next two quarters, LME cash nickel prices are likely to average $15,000 a tonne and stay in the plus/minus 5 per cent range.

Further, the biggest risk to nickel prices is the possibility that Chinese NPI output will continue to expand rapidly.

However, in the less likely event of the Indonesian ore export ban being strictly implemented, exports will fall sharply and prices can potentially rise to $17,000/t. But there are risks too, to this view.

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