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Commodities eye

Nickel's market polish may buck metals malaise

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Aluminium ingots are seen outside a warehouse that stores London Metal Exchange stocks in Port Klang Free Zone, outside Kuala Lumpur, on March 23.   © Reuters

BANGKOK -- Amid concerns in the mining sector that prices for metals and ores may not yet have found the bottom of the market, there may be light at the end of the tunnel for nickel, despite record high inventories being held by the London Metals Exchange.

     The price of nickel, which is one of the main ingredients in stainless steel, peaked at $51,780 per metric ton in the heady, pre-global financial crisis days of 2007. It then fell to $8,850 per metric ton in October 2008 before climbing back to $28,410 by Feb. 2011, according to the commodities reference site

     Like most metals, nickel went into free-fall after 2011, dropping further than most and hitting a seven-year low of $9,100 on Aug. 12, close to its 2008 market nadir. Since then, however it has bounced back by 15%, to close at $10,460 on Oct. 13, leading some to predict that this is the start of further improving fortunes.

     The market consensus is that nickel prices are set to rise further, and Alto Capital analyst Carey Smith recently forecast that the metal would return to $20,000 per metric ton by March 2017.

     About 70% of nickel produced globally is used in stainless steel, a widely used industrial alloy that also requires chromium. Most stainless steel contains between 8% and12% nickel, which brings qualities of toughness, corrosion resistance and strength at extreme temperatures, along with magnetic and electronic properties.

     Demand for stainless steel is growing slowly -- by 0.5% globally this year so far compared with the same period last year. However, analysts at Morgan Stanley are forecasting a pick up to 3.5% growth in 2016.
Prices may also benefit from supply constraints, thanks in part to the Indonesian government and debt-laden mining companies, led by the Swiss giant Glencore.

     Indonesia, which is Southeast Asia's most populous nation, has emerged as a major resources player in recent years, and is now the world's biggest nickel miner. In January 2014, Indonesia decided to ban the export of raw ores such as nickel ore and bauxite, from which alumina is extracted, insisting that processing should instead take place in Indonesia.

     Instead of exporting raw nickel ore, Indonesia is now a bit player in the export market for nickel pig iron, a product that is fed into stainless steel furnaces. In China, however, stocks of Indonesia's high quality nickel ore are all but run down, according to Morgan Stanley.

Mothballed mines

Separately, many mines are being mothballed as companies trim loss-making operations to reduce debt. After a dramatic 30% share price crash on Sept. 28, Glencore has become a byword for over-leveraged mining companies. The London-quoted stock has recovered most of the ground it lost in September, but its closing price of 118.05 pounds ($182) on Oct. 10 nevertheless represents a fall of 62% from its 2015 high of 313.30 pounds on April 28.

     Since the September stock plunge, Glencore's board has moved to bolster its assertion that it has a plan to reduce the company's $30 billion debt pile, suspending production at a range of copper and zinc mines in Africa, Australia, Central Asia and Chile and putting others on the market,

     In an illustration of the company's market power, Glencore's move to reduce its zinc output, accounting for 4% of global supply, added 10% to the commodity's price on Oct. 9. Analysts believe that Glencore's nickel mines in five countries, which as a group have underperformed for the company, could be next.

     Other miners are also cutting production. Australia's Mincor and Canada's Sherritt International have reduced nickel output, and more may follow. UBS commodities analyst Daniel Wood estimated in an Oct. 9 report that 50% of global nickel production is loss making at current prices.

     The overriding question is whether the bottom has been reached, or the upward tick in nickel prices is just a breather. For every analyst who has declared that the four-year-old commodities rout is over there is another warning of more doom and gloom.

     Monthly import figures from China, released by the country's National Bureau of Statistics on Oct. 13, will not have provided the cheerleaders with much joy. Chinese nickel ore imports were down 39% year on year, lead ore was down 21% on the same basis and -- after adjusting for port stockpiles -- iron ore imports were down by 6.5% on a monthly basis. On an annualized basis iron ore imports were at the same level as last year.

     Then there are those pesky LME nickel inventories that have weighed on the price. In June they touched a 20-year high of 465,564 metric tons of nickel, in a global market that uses only 2 million metric tons a year. The current level of warehouse stocks compares with 54,000 metric tons when nickel was at its October 2008 low.

     Even in this, however, there is good news. According to Morgan Stanley "almost 60% of the holdings are full plate cathode, the least preferred form of [the] metal," which requires cutting before it can be used. So the light at the end of the tunnel is still flickering.

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