Commentary: Nickel market may be missing the bigger picture, Roskill says

With 2014 approaching, the nickel market is looking to Indonesia. At the beginning of December, the Indonesian government signalled that it would implement a ban on unprocessed mineral ores. In an edited press release, London-based Roskill nickel analyst Thomas Hohne answers some of the major questions related to the ban and its effect on the nickel market, and shares some of Roskill’s views of what other factors will be driving the nickel market in the years to come.

What should we expect to happen come January 2014?

Thomas Hohne: Shipments are set to be barred from Jan. 12 onwards, as proposals for a phased introduction of the ban have been discussed, but not adopted. With Indonesia’s earnings from ore exports in the range of US$10 billion in 2013 — much of which would evaporate overnight — pressure for some intermediate solution will remain. Because of this, however, any temporary solution is likely to be reached after the imposition of the ban, rather than before. Moreover, Indonesian officials have indicated that even as the legislation will go ahead, implementation of the ban may allow for some amendments in practice.

What will be the effect of the ban on the nickel market?

TH: Indonesian nickel ore accounted for 59% of China’s nickel-ore imports in 2013, but demand for nickel ore has been artificially elevated in anticipation of the ban. Although Roskill estimates Chinese production of charge and refined nickel at 659 kilotonnes in 2013, real demand is considerably lower. Stockpiles of unprocessed nickel ore in Chinese ports are estimated to be in the range of 20 megatonnes, while consumer stocks of nickel pig iron (NPI) are estimated at over 280 kilotonnes. Roskill also expects that in spite of a temporary disruption early in the year, ore exports from Indonesia will continue, with the Philippines increasing exports.

NPI production in China is expected to flatten out, bringing supply in line with real demand. So far, the effect on prices of the announced ban has been relatively subdued. Prices made a small recovery in the first week of December, but this followed a drop in November that pushed the nickel price back to well under US$14,000 per tonne. In combination with the stockpiles of nickel ore and NPI, there is sufficient flexibility in the market such that any increase in prices as a result of the ban will likely be gradual, although speculative activity could result in short-term spikes.

What will be the likely medium and long-term implications of the ban?

TH: Roskill’s nickel report provides an overview of a selection of the 89 smelter proposals that Indonesian officials report to have received, of which only a small portion have commenced construction. In China’s case, when NPI was first produced, production increased by 175 kilotonnes over a period of five years. This time around, projects in Indonesia benefit from strong financial backing and access to established technologies, but face a diminished price outlook and infrastructural challenges, particularly in regards to electricity access. Rotary kiln electric furnace (RKEF) projects may be particularly delayed, and Roskill forecasts NPI production in Indonesia in terms of nickel content to increase to 37 kilotonnes in 2015, to just under 150 kilotonnes by 2018.

NPI production in Indonesia (and, possibly, the Philippines) also circumvents the 20% export tariff that China imposes on NPI exports, and opens up the possibility of NPI exports to the rest of the world — although with most of the smelter projects Chinese-owned, this would probably account for a small share of total NPI production.

How likely is the Philippines to follow suit?

TH: There is no doubt that Philippine officials will be carefully monitoring Indonesia’s experiment. While a bill promoting the development of mineral processing was proposed during the last congress, it failed to reach the country’s Senate, and has not gained any momentum since. The Philippines, however, is likely to reap some of the windfalls of increased demand for its nickel ore as a result of reduced availability of Indonesian ore, and it’s possible that the export tax on nickel ore will be raised from 2% to 7% in 2014.

What else lies in store, beyond the Indonesian ban?

TH: Nickel reserves in Indonesia, according to estimates by the U.S. Geological Survey, amount to 10 years of production at 2013 output levels. In the Philippines, however, reserves of 1.1 megatonnes represent less than three years’ worth, so the discovery, exploration, upgrading and development of further lateritic-nickel ore deposits — in the Philippines and beyond — remains a priority.

In China, the trend towards producing higher-grade stainless steel and higher-grade NPI is likely to continue. In 2013, high-grade NPI of 9–15% nickel is estimated to have accounted for 81% of total NPI production, up from 44% in 2010. The substitution of blast furnaces by RKEFs has also impacted production costs, reducing costs by 25%. Further innovations lie ahead, such as Rotary Kiln Direct Reduction (RKDR) plants, which can accept a variety of nickel ores as feedstock, and produce NPI with nickel content of up to 20%.

What effect on prices may be expected, if any?

TH: Since 2011, the nickel price has fallen as a result of a surplus overhanging the market. This could continue over the next few years, as recently completed, large-scale operations are ramping up to full production. Whereas no shortage of nickel is forecast in the near-term, a forecast demand growth rate of 3.9% per year — combined with the slow pace of advancement of nickel projects — will result in an eventual rebalancing of the market, towards the end of Roskill’s outlook period in 2018.

While Roskill forecasts a gradual increase in nickel prices through 2015 as a result of the Indonesian ban, a stronger increase is expected from the end of 2017 onwards, as prices eventually increase to permit investment in future capacity that can supply the market into the next decade. Forecasts are affected not only by trends in demand and production costs, but also by investors’ perceptions of risk and capital availability, which vary between locations, as outlined in Roskill’s report. In its baseline scenario, Roskill forecasts prices to recover to US$18,000 per tonne by the end of 2018 in real terms (or US$19,942 per tonne in nominal terms), with more increases expected thereafter.

— Roskill’s Nickel Market Outlook to 2018 contains full estimates for 2013, profiles on major producers and projects, an assessment of key market and technological trends, a discussion of the Indonesian export ban and an outlook for supply, demand and prices to 2018. For more information visit www.roskill.com/nickel.