Nickel market divided over scope and effect of Indonesia's raw material export ban
By Greg Smart.
November 20, 2013 - Nickel has been the worst performing base metal this year on the London Metal Exchange with a poor fundamental outlook keeping prices under pressure and the metal remaining a "short" target for funds.
Three-months nickel on the LME has fallen around 30% in 2013, having traded at a year high of $18,700/mt in February before dropping to a year low of $13,205/mt in July.
The three-month nickel contract is currently trading around $13,500/mt on LMEselect.
Much of the problem for the nickel market has been supply-side related, with a significant global surplus having developed over the past two years.
Analysis continues below...
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A combination of new large laterite projects and increased Chinese nickel pig iron (NPI) supply has pushed the market into oversupply, with analysts expecting capacity to continue to grow over the next two to three years before the market moves into deficit.
In addition, LME warehouse stocks hit a record high of 248,850 mt November 21.
Demand for nickel ex-China has also weakened since the onset of the financial crisis and the combination of increasing supply, weaker regional demand and low prices has seen producers struggle, with around 30% of global production estimated to be loss making at current price levels.
However, a potential ban on nickel ore exports from Indonesia to be implemented at the beginning of January could see prices recover from their current lows, but market opinion remains divided on the likelihood of the Indonesian government going ahead with its plans.
The nickel market has seen capacity increase significantly over the past five years.
According to statistics from the International Nickel Study Group, global nickel production has increased by 25% from 1,410,000 mt in 2007 to around 1,761,000 mt in 2012.
Citi Research sees global nickel production increasing to 1,905,000 mt in 2013, and increasing further to 1,969,000 mt in 2014 and 2,049,000 mt in 2015.
The bank is is estimating a global surplus of 75,600 mt this year.
Some of this supply increase has come from new large nickel laterite projects that are currently ramping up capacity.
These include VNC (New Caledonia - full capacity 60,000 mt/year), Ambatovy (Madagascar - full capacity 60,000 mt/year), Koniambo (New Caledonia - full capacity 60,000 mt/year), Sorowako (Indonesia - full capacity 80,000 mt/year), Onca Puma (Brazil - full capacity 57,000 mt/year) and Barro Alto (Brazil - full capacity 36,000 mt/year), and Talvivaara (Finland - full capacity 50,000 mt/year).
Although some of these projects are experiencing delays, output issues and financial difficulties, analysts note that producers are eager to attain targeted full capacity to bring costs down.
Another significant factor in the supply picture has been the significant increase of Chinese NPI production, and the ability of this industry to cut production costs.
Chinese NPI production is currently estimated to be around 400,000 mt/year with some analysts estimating actual capacity to be around 600,000 mt/year.
Lower cost rotary kiln electric furnaces (RKEF) have also seen production costs significantly reduced compared to older electric arc and blast furnaces, with some RKEF capacity reported to produce NPI as low as $12,500/mt.
NPI production has also added to the pressure on LME nickel prices.
Limited production cutbacks