Summary: The world’s biggest nickel producer and a number of investment banks believe the worst is over for nickel. Despite past price falls and a major fraud in metal financing, observers believe the market is now balanced. China is searching for a replacement of the raw material it lost after Indonesia banned unprocessed exports, and shipments from the Philippines are set to ease in coming months.
Key take-out: If ANZ’s forecasts are correct, the nickel price could lift more than 50% to over $US11 a pound over the next 12 months.
Key beneficiaries: General investors. Category: Commodities.
Nickel, the metal which has given Australia some of its most exciting mining moments over the past 50 years, is shaping up for another period of intense news generation as pressure builds among international metal traders and local nickel-mining companies.
Bankers can sniff the change coming, with normally cautious analysts at ANZ tipping a 50% increase in the nickel price over the next 12 months.
Producers, including the world’s biggest, Russia’s Norilsk Nickel, say the market for the steel-hardening metal is balanced today but poised to surge higher.
Market regulators, including the all-important London Metal Exchange, have reported highly unusual movement in nickel stockpiles, which indicates a significant shift in the way the metal is being stored and traded.
Australia’s biggest producer of the metal, BHP Billiton, is trying to sell its WA-based Nickel West division but either can’t get the price it wants, or is hanging on for the forecast increase in the price of the metal to maximise the value of the deal.
For investors, some shell-shocked by the collapse in the price of other minerals and metals, especially gold and iron ore, the suggestion of a nickel revival might be hard to digest.
But that’s when it becomes important to remember what Hugh Morgan said in a Eureka Report exclusive two weeks ago (see Morgan: Base metals to rebound first): that it would be the base metals (copper, zinc, nickel and aluminium) which would lead the recovery in mining.
The former head of Western Mining Corporation (WMC), the company which pioneered Australia’s nickel industry in 1966, warned that there was a tendency to view Australian mining through a narrow lens which focussed on iron ore and coal.
“But we shouldn’t forget the base metals (copper, zinc, nickel and aluminium), and even gold,” Morgan said.
That observation needs repeating because of the recent sequence of events that are dramatically changing the nickel market, although with one action cascading over the next it has become difficult to see the overall trend.
Figure 1: Nickel spot price, past 12 months
To get a better understanding of what’s changed in nickel consider this sequence of game-changing events:
- Ten years ago, an earlier nickel boom forced Chinese steel mills to find additional sources of nickel to produce stainless steel. They invented a new trade in unprocessed, low-grade ore, shipped from Indonesia. Dubbed Nickel Pig Iron (NPI), the new material quickly flooded the market, killing the nickel price which plunged from $US12 a pound to $US6/lb.
- Last year, the Indonesian Government said it would ban the export of unprocessed ore. At first, the threat was dismissed as political posturing, but the ban has been introduced and the trade is almost dead.
- At the same time as the ore-trading ban was coming into effect two other things happened. The price of nickel shot up from $US6/lb to $US9/lb, and a major fraud in “metal financing” was uncovered in the Chinese port of Qingdao where different banks discovered that they had been making loans secured by the same stockpile of metal.
- As the fraud was unravelled and ownership of stockpiled metal sorted out the nickel market was plunged into more uncertainty by the unexpected delivery of close to 100,000 tonnes of nickel metal into warehouses managed by the London Metal Exchange.
- The “new” metal represented a 35% increase in LME stocks which rocketed up from around 280,000 tonnes to 380,000 tonnes, a flood of metal which was met by a corresponding fall in the nickel price, back to around $US7.30/lb.
- Today, there is a growing realisation that the metal delivered to the LME is not new metal. It is the metal being shipped out of fraud-riddled Qingdao.
Because of the Chinese metal-financing fraud, and because nickel is a metal which has always had a second-tier and less transparent set of stockpiles (such as those kept by steel mills) there is a reluctance to accept that all the bad news is in the market.
Norilsk Nickel believes the worst is over, as do ANZ and a number of other investment banks.
The head of strategic marketing at Norilsk, Anton Berlin, told the Bloomberg news service on October 9 that the rise in the LME stockpile masked a balanced market.
“What is happening now is that the stockpiles are just flowing from non-transparent to transparent warehouses,” Berlin said.
ANZ shares that view. Its senior commodity strategist, Daniel Hynes, said in a research note last week that recent Chinese “exports” of nickel were “merely the movement of previously hidden inventories”.
In China, the world’s biggest consumer of nickel, a rush is on to find a replacement of the raw material lost through the Indonesian ban on unprocessed exports. That has led to a rise in shipments from the Philippines, but that is lower grade ore and there is less of it.
With multiple factors at work, including the biggest issue of all, whether Indonesia will retain its ore-export embargo, the nickel market is entering unchartered waters with supply and demand being buffeted by competing forces and distorted by the Qingdao fraud.
ANZ, however, is clear in its interpretation of the situation.
“The fundamentals remain unchanged,” Hynes wrote. “The market remains on track to move into a sizeable deficit as the Chinese NPI industry adjusts to life without Indonesian nickel imports.
“In the short term, rising LME inventories will remain a headwind, as with the rising U.S. dollar. But with Philippines exports expected to ease in the coming months, we feel prices should start to ease higher over the last couple of months of the year.
“Real upward momentum in prices is still not expected until early 2015.”
If that assessment by the ANZ’s senior commodity strategist is correct than his nickel-price forecast might also be correct, and that’s for a tighter market pushing the price “beyond $US25,000 a tonne” – or more than $US11/lb which would be 50% more than the latest nickel price of $US7.37/lb.