April 3, 2018 / 12:43 PM / 4 months ago

COLUMN-Is there an electric accelerator to falling nickel stocks? Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

* Nickel Market Balance: tmsnrt.rs/2Egk6hs

* Exchange Stocks: tmsnrt.rs/2GNIZXb

By Andy Home

LONDON, April 3 (Reuters) - Stocks of nickel held in London Metal Exchange (LME) warehouses MNI-STOCKS fell by 46,344 tonnes, or 12.6 percent, over the first quarter.

The downtrend has been running for seven consecutive months but there has been a marked acceleration since the start of January.

Cancellation activity, metal being taken off warrant in anticipation of physical load-out, has also been elevated. There were 54,294 tonnes of net new cancellations last month, most of them at the Malaysian port of Johor.

The ratio of cancelled to total LME tonnage has risen above 40 percent for the first time in two years.

Nickel stocks registered with the Shanghai Futures Exchange (ShFE), meanwhile, stand at 47,426 tonnes, a long way off their 2016 peaks above 100,000 tonnes.

Falling exchange stocks appear to reinforce a narrative of a market that has transitioned to supply deficit.

But, to quote analysts at Macquarie Bank, “visible inventories are being drawn down quicker than we had expected and there is a question mark around how available these inventories are.” (“European Metals and Mining”, March 27, 2018)

Is there then another driver at work?

Perhaps an electric one?

Might the lithium-ion battery supply chain preemptively be starting to build nickel inventory?

Graphic on INSG’s estimates of refined market balance:

tmsnrt.rs/2Egk6hs

Graphic on LME and ShFE nickel stocks:

tmsnrt.rs/2GNIZXb

DEFICIT NOW

The International Nickel Study Group (INSG) calculates a global 103,000-tonne shortfall in primary nickel production relative to usage last year.

It was the second consecutive year of deficit after a 42,000-tonne shortfall in 2016.

But one that should be seen in the context of the near 500,000-tonne surplus that was accumulated over the 2012-2015 period.

Up until a few months ago, the impact of any deficit on visible stock levels, particularly those in the LME system, was marginal. LME stocks registered a net fall of just 5,000 tonnes over the course of 2017.

However, two accelerators have since kicked in.

The first came from Brazil’s Vale, the world’s largest nickel producer, which announced in December it would reduce production by 45,000 tonnes this year through care and maintenance programmes.

The second came from the cyclone that knocked out the Ambatovy nickel plant in Madagascar in January.

Operations resumed in February but majority owner Sumitomo Corp has warned of lower run-rates through the first half of the year.

It makes sense that the LME system might be tapped to fill any resulting supply chain gaps, but not to the extent implied by the scale of stock draws and cancellations seen in the first quarter of 2017.

In the broader nickel market, moreover, a new supply surge is building, promising feast not famine.

INDONESIA RETURNS

Indonesian production of mined nickel jumped by 74 percent to 345,000 tonnes last year, according to the INSG.

January’s output of 37,000 tonnes was up another 60 percent year on year.

The resurgence of the country’s nickel mine sector results from last year’s relaxation of a previous ban on nickel ore exports and the build-out of domestic integrated stainless steel capacity.

Indonesian ore is once again flowing to China’s nickel pig iron (NPI) producers who feed the country’s massive stainless steel sector, still the world’s largest collective user of nickel.

China imported over 1.9 million tonnes of Indonesian ore in January and February, up from next to zero in the same period last year and displacing the Philippines as top supplier.

China also continues to import significant quantities of NPI from a new generation of operators who have built plants in Indonesia.

And, it is now also importing Indonesian nickel in the form of stainless steel product thanks to Tsingshan Group’s construction of a stainless mill in Indonesia itself.

Indeed, China flipped to net importer of hot rolled coil stainless steel for the first time in seven years in December thanks to 127,000 tonnes of Indonesian imports, according to CRU. (“CRU Insight”, Feb. 21, 2018)

The reinvigoration and reshaping of this ore-nickel pig iron-stainless supply chain has been keeping a lid on China’s imports of refined nickel.

Notwithstanding a late-year burst, net imports of refined metal fell by 38 percent to 220,000 tonnes in 2017.

At 40,000 tonnes in the first two months of this year, they were up on last year’s low base but still humdrum by historical standards.

DEFICIT TOMORROW?

Seen through a stainless steel prism, the sudden interest in LME nickel stocks doesn’t seem to make much sense.

But then none of that new Indonesian nickel is much good for those that need top-end Class I material like that sitting in LME warehouses.

That includes battery makers who need the metal in sulphate form to make lithium-ion batteries. Sulphate can only economically be made from Class I material.

And if you’re in the battery business, the future supply outlook is troublesome.

Just under half of all global nickel production last year was suitable for battery-makers, according to S&P Global Market Intelligence.

Deposits of the “right” sort of nickel are rare so while overall nickel mine production will increase by 12 percent from 2017 to 2020, mined supply suitable for battery manufacture will only grow 2 percent over this period. (“Nickel supply energised by electric vehicles”, March 13, 2018)

The full impact of the electric vehicle revolution on nickel’s broader market dynamics is widely viewed as a future story.

But the broader dynamics are those of a metal mostly used as an alloy to be melted into steel.

The specific dynamics of battery-grade nickel, by contrast, may already be diverging with preemptive moves to secure units in a tightening product space.

Macquarie analysts seem to think so: “Although the (electric vehicle) battery demand is a few years away from being meaningful, stocking up in the supply chain ahead of this demand is supportive.”

If strategic stock build is the third accelerator in falling LME stocks, it would mean the electric vehicle revolution has arrived a lot earlier than expected on the LME.

It would also be a tangible sign of the tensions in the nickel market between nickel as stainless steel input and nickel as lithium ion battery input.

Editing by Jason Neely

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