Macquarie – nickel

Nickel

Too much potential supply from Philippines and Indonesia

The nickel market has suffered a triple blow in recent months. First, the Indonesian government partially relaxed its nickel ore ban in January, leading to the prospect that 50- 100kt of nickel contained in ore could be exported this year. Secondly, the removal of Gina Lopez as Mines’ Minister in May dramatically reduced the likelihood that up to 50% of the nickel mines in the Philippines could be closed for environmental reasons. Finally, after a strong first quarter of 2017 for nickel demand, falling nickel and chrome prices have triggered a vicious destocking cycle in stainless steel.

As a consequence of the above factors, the nickel market, which had moved into deficit between supply and demand last year and in the first half of this year, is likely to move into small surplus during the remainder of 2017. While we expect small deficits over the next few years, the size of the deficits will now be too small to make major inroads into the still-large overhang of nickel stocks, which are the highest of any of the base metals.

The impact of the Indonesian ore export ban relaxation is devastating to the market outlook for the next 3-4 years and there are legitimate fears that export licences could greatly exceed market expectations (of 7-10mtpa).

Furthermore, the ban’s relaxation does not appears to have dented the rate of investment in new nickel pig iron capacity in Indonesia, since the economics of building new capacity is still positive at current low prices. We have raised our forecasts of Indonesian nickel pig iron production significantly since January and fear we may be forced to do this again in the coming quarters. We have raised our 2021 projection for Indonesia from 350kt to 450kt.

The extremely strong 2016 demand performance of nickel was driven by booming Chinese stainless steel production and strong demand growth for nickel in batteries for electric vehicles. Global nickel demand grew by an estimated 8.5% YoY in 2016 and by over 10% YoY in the first quarter of 2017.

The strength of demand to a large extent reflects a restocking cycle in stainless steel, particularly in China, driven by steadily rising stainless steel prices last year and into 2017, which were mainly driven by rising nickel and ferrochrome prices. Once ferrochrome and nickel prices starting falling in recent months, buyers of stainless steel have started destocking in anticipation of lower stainless steel prices.

The good news for nickel is that these cycles are typically short-lived (3-6 months) and that production tends to bounce back after the destocking cycle ends (typically when raw material prices hit bottom). We do factor in slowing economic growth in China into our 2H2017/2018 forecasts but do not see any reason for great concern, as the Chinese

Nickel use growth is forecast to fall to 3% this year from 8.5% last year and then to rebound to ±4% in the coming years, with growth in nickel in batteries adding at least 1% a year to global growth (nickel in batteries was only around 3% of global use last year).

Low nickel prices in late-2015 and early 2016 led to over 70% of the industry moving into loss-making and large price-related production cuts, which more than offset increases in production in Indonesia and a number of other new suppliers. Overall, global refined nickel production was flat YoY in 2016 following a small fall in 2015. Global supply should return to growth from 2017 onwards, due mainly to new NPI capacity in Indonesia.

However, a combination of low nickel prices and unexpected supply disruptions led to global production, excluding NPI, falling by 8% YoY in the first quarter of 2017. With around half the nickel industry losing cash at around $9,000/t, further cuts appear likely, especially now that hopes of being bailed out by policy-related cuts in the Philippines now appear to have gone.

While the market is expected to remain in deficit in every year to 2021, the size of those deficits is smaller than our previous projections and the pace of price recovery we expect is slower. In addition, we have lowered our long-run price from $15,000/t to $13,000/t to reflect the lower incentive price for Indonesian NPI capacity and that it is unlikely that higher-cost greenfield capacity will be needed at least for ten years.

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