Are brighter skies ahead for nickel prices?

Chairman and CEO Patrick Buffet of French nickel and manganese producer Eramet is calling Indonesia’s recent ban on the export of unprocessed nickel ores “a positive step towards restoring market balance,” after the company’s nickel division posted an operating loss in 2013 that reflected low prices for the metal.  

Despite a 5% increase in global stainless steel production, London Metal Exchange nickel prices fell 14% to US$6.80 per lb. in 2013, compared with US$8 per lb. in 2012, according to Eramet. In the second half of 2013, nickel prices slid to an average of US$6.30 per lb.

Eramet pointed to China, claiming that producing nickel pig iron in the country using ore imports from Indonesia and the Philippines has nearly tripled in just three years, and totals almost a quarter of global supply.

On Feb. 21, Eramet announced that the deteriorating nickel market and short-term outlook for nickel prices means that they are putting off an investment decision on its flagship Weda Bay nickel project in Indonesia. With low nickel prices, the project could not be financed on “satisfactory terms” Eramet said, adding that management and its partners on the project — Mitsubishi and PT Antam — had yet to reach “a suitable legal and tax framework” for the project with the Indonesian government. 

The nickel market is different than it was five years ago, mainly due to nickel pig-iron production in China, where technology has been honed to upgrade the ore to make nickel pig iron, says Patricia Mohr, Scotiabank’s vice-president of economics and commodity specialist. (Chinese steelmakers have been turning to nickel pig iron produced from low-grade laterite nickel ore as a cheaper alternative to pure nickel.)

“My understanding of the market is that last year in 2013, China was stockpiling ore from Indonesia ahead of a potential ban on the export of processed nickel-containing ore and they really unnerved the market, and that’s one of the key reasons nickel prices softened,” she says. “By the end of the year there were many operations around the world — and I’m not talking about Canadian operations — that were not covering their break-even costs, including depreciation and expenses.”

But the commodities specialist believes that the outlook for nickel prices is probably brightening with the implementation of Indonesia’s ban in January. She predicts that by the second half of 2014, China will have used up its inventories of ore from Indonesia that it can use to operate nickel pig iron plants, and nickel prices will firm up. Mohr forecasts nickel prices will average US$6.90 per lb. in 2014 and US$8 per lb. in 2015. “It’s a supply story, but I think it will turn around slowly,” she says.

Raymond Goldie of Salman Partners estimates that China’s ore stockpiles from Indonesia are enough for the country to keep producing pig nickel until year-end, at which point it will eliminate most of its pig nickel production. To offset declining production, he believes China will boost refined nickel imports from the Western world.

“China’s imports should continue to increase thereafter, because China’s nickel consumption should grow faster than its ability to smelt and refine nickel,” Goldie reasons in a Feb. 18 research note. “Thus, we expect net exports from the former East Bloc to become even more negative than the minus 0.10-million-tonne-per-annum rate that we have projected for early 2015.”

The mining analyst estimates that Western nickel inventories will drop to 100 days of consumption in 2016. “Once inventories have hit that pinch point,” he adds, “we expect that nickel prices could rise sharply to the double-digit level.” While prices could remain flat until 2016, he expects the spike by 2017.

Andrew Mitchell, principal nickel analyst at Wood Mackenzie in London, expects nickel prices will climb in the fourth quarter of 2014 and average US$6.90 to US$7 per lb. for the year, before moving up to US$8 per lb. in 2015 and as high as US$10 per lb. in 2016.

Mitchell points out that last year nickel production in nickel pig iron totalled 490,000 tonnes, but anticipates the number will fall to 450,000 tonnes this year and 250,000 tonnes in 2015.

“Assuming the Indonesian ban remains in place, ore stocks will be worked through, and 2015 becomes a different picture because we see the likelihood of a shortfall in supply being quite large,” Mitchell says. “To make up that lost nickel production [in China] it’s got to come from somewhere, and realistically where you’d expect it to come from is Chinese investment in Indonesia, because they’re relatively quick at building plants in comparison to Western world projects, which tend to take a lengthy time to build and ramp up.”

Mitchell notes that there are three Chinese projects under construction in Indonesia that could come into production by late 2014, but more likely at the end of 2015. 

On the demand side, Mitchell says, last year saw a 7.5% growth in global nickel ore consumption in all forms, and anticipates demand growth in 2014 will rise to 8%.

But the big uncertainty, he says, is whether Indonesia’s ban will remain in place. 

“If it doesn’t, it’s a whole different ball game — and nickel will go into oversupply again.”

While neither Mitchell nor Mohr claim to be experts on Indonesian politics, both believe that the ban stays in place. 

“The reason that everyone didn’t think the ban would happen is that nobody believed Indonesia could afford to lose that revenue, particularly given the country’s present state of play with its own economic situation,” Mitchell says. “It would probably rather have that revenue coming in, but at the moment the ban is holding and there’s no suggestion from either political party that they would change it.”

Macquarie Research points out that Russian aluminum and nickel producers Rusal and Norilsk reportedly plan to invest up to $6 billion in processing facilities in Indonesia. “If true, a reversal of the ban would be unlikely,” Macquarie’s analysts write in a Feb. 28 research note to clients. 

Macquarie also noted  that Tsingshan — the largest stainless steel and nickel pig-iron producer in China — is reporting that prices for high-grade nickel ore (1.8% nickel) from the Philippines have climbed from US$36 per tonne free-on-board Philippines (excluding freight) at the beginning of February to US$49 per tonne at press time.

“While Tsingshan built 8 million tonnes of ore stocks [enough for one year’s production at last year’s rate] and is fast-tracking a 30,000-tonne-per-annum nickel pig-iron plant in Indonesia [to start at year-end], others are in a more precarious position, with smaller players scrambling for material.”