Commodity Analysis

Steel fortunes to shape nickel outlook

G Chandrashekhar | Updated on January 09, 2018 Published on November 19, 2017

Stainless steel production forecast to grow at 2.7 per cent this year

The world nickel market is currently buffeted by demand and supply forces; but the demand side seems to have an edge.

Although nearly two-thirds of global consumption demand for nickel is from the stainless steel industry, nickel prices have surged recently following strong demand prospects for electric vehicles (EVs). The big question is whether the recent price gains are sustainable.

The best thing to have happened to metals demand, nickel demand in particular, is the introduction of electric cars, which typically have more metal content than IC (internal combustion engine) vehicles. So, EVs are going to have high nickel content, including in batteries that power them. In most lithium-ion batteries, nickel is used as a cathode.

Yet, demand for the base metal is even now significantly driven by the stainless steel market, which will remain the key to the outlook for nickel demand in the foreseeable future.

After a stellar growth of 10 per cent in 2016, stainless steel production is forecast to grow at 2.7 per cent this year. Although China’s (largest player) stainless production has improved, concerns about the sustainability of the revival remain. There is a proposal to cut the steel capacity in the Asian major.

Supply outlook

The nickel supply situation is comfortable. Stocks are high. According to a report, LME stocks have eased back since their peak in 2015, but they remain high by any measure at 40,000 tonnes or 30 per cent of annual usage. These stocks have to be worked off and it is going to take time. This is precisely why EVs have come as a shot in the arm for the market.

The market, however, is not without supply concerns. There is less clarity on the mining and ore export policy of the Philippines and Indonesia, two major suppliers to China’s NPI (nickel pig iron) industry. NPI production, which accounts for nearly a third of total nickel supply, is growing moderately in China amid uncertainty about nickel ore imports from its two major source countries.

Earlier this year, the Philippines imposed restrictions on nickel mining — it suspended 17 of 28 nickel mines — on environmental grounds following an audit and there is fear it may ban ore export.

Indonesia has, of course, eased the ore export policy this year, but uncertainties loom. In China, pollution has emerged as a big issue and the NPI sector is closely monitored.

What drives demand?

To be sure, at the moment, nickel demand through the EV sector is minuscule — less than 3 per cent of nickel output; but this demand is expected to accelerate over time as more countries and markets encourage EVs.

However, given the large inventory of nickel, additional demand (through EVs) can be absorbed without much difficulty. In other words, EV is a medium to long-term story, rather than a short-term trading call.

Without doubt, the fortunes of the stainless steel industry will continue to dictate the outlook for nickel prices in 2018.

The refined nickel market, which went into annual deficit in 2016, is likely to face increased deficits in the next three years which will help overcome the accumulated inventory of about 470,000 tonnes till 2015. China has had an impressive reduction of inventory in 2016 and 2017 so far.

Global refined nickel production in 2017 is estimated at 2.06 million tonnes(1.98 mt) while consumption is rated as 2.11 mt (2.03 mt), a deficit of 0.5 mt.

The deficit is forecast to gradually widen over the next three years. China accounts for a little over half of the global consumption.

On current reckoning, on the LME, nickel is forecast to trade at an average price of $11,500/t in the first quarter of 2018, moving higher to $12,000/t in Q2 next year. In the second half of 2018, prices may average $12,500/t.

The upside risks to prices include more robust global demand and/or accentuated supply shortage.

The writer is a commodities market specialist

Published on November 19, 2017

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