LONDON (Reuters) - Nickel is enlivening an otherwise torpid summer for the base metals complex.
The market is on a bull charge in both London and Shanghai.
London Metal Exchange three-month nickel has jumped 23% since the start of June and at a current $14,250 per tonne is trading at its highest level in a year.
Chinese speculators are surging into the Shanghai Futures Exchange contract, which is also nudging one-year highs.
The trigger for this collective exuberance is news that Indonesia will stop allowing the export of unprocessed nickel ore in 2022.
Since this is a key raw material pipeline for China’s giant nickel pig iron (NPI) sector, the price reaction might seem rational.
Except that the “news” is not new. The 2022 deadline was set in 2017, when the Indonesian government allowed a five-year grace period for ore exporters in return for investment in processing capacity.
How much nickel ore the country will be exporting come 2022 is also a highly moot point.
But such niceties have done nothing to damp speculative buying interest, proof perhaps that Goldman Sachs was right when it described nickel as behaving like a biotech stock.
Indonesia introduced a ban on the export of unprocessed minerals in January 2014 with the explicit aim of forcing miners to build domestic processing capacity.
The nickel market was caught unawares, even though the law had been pending for five years. The price surged to a mid-2014 peak of $21,625.
Indonesia’s exports of nickel ore ground to a halt over the course of 2014-2016, although the expected hit on China’s NPI sector never materialised because of the rise of the Philippines as an alternative supplier.
January 2017 was supposed to see the ban reaffirmed and exemptions such as that for copper concentrate ended.
However, the Indonesian government did an about-turn, perhaps accepting that getting smelters built in such a short period of time was unrealistic.
It pushed back the deadline to 2022 and introduced a system of annual export permits for those operators who could prove they were building processing plants.
Progress is regularly reviewed. Four miners, three nickel and one bauxite, had their export licences suspended in August 2018. Two, both nickel, were subsequently reinstated after demonstrating they had met the conditions.
Nickel ore exports to China kicked back in over the course of 2017 and have picked up momentum ever since. However, they have not displaced Philippine material. China imported 1.7 million tonnes of nickel ore from Indonesia in May. Imports from the Philippines were higher at 3.3 million tonnes.
China’s nickel ore buyers have successfully diversified their sourcing to reduce their reliance on Indonesia, cushioning them against another complete export ban.
It’s also highly uncertain how much nickel ore Indonesia will be exporting in 2022 anyway.
The comments that triggered the recent market excitement were made by Indonesian Energy and Minerals Resources minister, Bambang Gatot Ariyono, in a July 8 parliamentary hearing.
He reaffirmed the 2022 cut-off point for all unprocessed mineral exports but with the important caveat that the ministry forecasts there will be 41 smelters, including 22 nickel smelters, operating in the country by that stage.
That may be on the optimistic side but Indonesia’s policy of pushing miners towards downstream processing is undoubtedly working.
China’s Tsingshan Group has gone all the way down the processing chain, offshoring some of its mainland stainless steel capacity with a three million tonne-per-year plant in Indonesia fed by local nickel ore.
It and others are now looking at building capacity to produce battery-grade nickel to meet rising demand from electric vehicles (EV).
Some operators are just converting ore to nickel pig iron and shipping the intermediate product to China.
All this evolving processing capacity will naturally reduce the amount of ore available for export by the time the ban comes into full force in 2022.
Assuming, of course, the Indonesian government doesn’t change its mind again at that stage.
None of which matters in a market where speculative momentum has taken over.
The move higher may have started in London but it’s the Shanghai market that has been setting the more recent pace.
The Shanghai futures market is experiencing one of those speculative surges that characterise commodity trading on Chinese exchanges.
Market open interest has mushroomed by 47% in the space of two weeks as the price has risen. Volumes are running at their highest levels in a year.
All of which should ring alarm bells about what happens if the upward momentum stalls.
So should talk in London of producers selling forwards at these price levels and a pick-up in interest for downside put options.
There is more than a whiff of irrational exuberance to nickel’s stellar performance over the last couple of weeks.
But the current market dynamics merely reinforce nickel’s “hope stock” status conferred by analysts at Goldman Sachs,
A “hope stock”, such as a small biotech or software start-up, trades above any rational projection of its current operating metrics basis the “hope” that it will outperform at a future date.
So nickel, while currently linked to the fortunes of the stainless steel sector, is simultaneously pricing in a premium for its future usage in the EV revolution.
Against a backdrop of broader investor interest in anything and everything metallic that goes into a lithium-ion battery, nickel is now firmly on the speculative radar.
That much is clear from the Shanghai crowd-surge but speculative buying, both in the paper and physical markets, has become an ever more noticeable feature of the London market over the last couple of years.
It means nickel is constantly primed for the sort of mini-burst higher currently underway.
It doesn’t matter that an Indonesian nickel ore export ban is still three years away. Or that it will take even longer for the EV demand pull to outweigh that of stainless steel.
Nickel has got the speculative bug.
Looks like it’s going to be a bumpy ride until further notice.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jane Merriman