Nickel Glut Extends to Fourth Year on China Supply: Commodities

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Oct. 21 (Bloomberg) -- The global glut of nickel will extend into a fourth year in 2014 as new technology lowers costs for Chinese furnaces producing record amounts of a lower-grade substitute that helped drive prices into a bear market.

Chinese producers will supply 456,000 metric tons of nickel pig iron in 2014, or 49 percent more than last year, Morgan Stanley estimates. Costs at their rotary kiln electric furnaces more than halved to $11,000 a ton in five years, according to Beijing Antaike Information Development Co. That implies they’re still profitable even after prices slumped 16 percent since the start of 2013, reaching a four-year low of $13,205 in July.

China expanded NPI output from 3,000 tons in 2005 to make the stainless steel needed for its construction boom after costs for pure nickel reached a record $51,800 in 2007. While slumping prices previously shut furnaces in China and curbed excess supply, the new technology means they can now compete with traditional refineries. The cumulative surplus since 2007 will have reached about 589,000 tons by the end of 2014, or almost four years of U.S. demand, Morgan Stanley says.

“Most traditional nickel producers cannot compete on price and are having to close or scale back operations,” said Gavin Wendt, the founder and senior resource analyst at Sydney-based Mine Life Pty., who has followed the mining industry for more than two decades. “The biggest factor damping prices at present is the increasing level of China’s production of NPI.”

Trader Estimates

Nickel tumbled into a bear market in May and traded at $14,372 on the London Metal Exchange today. Its slump is the worst among the six main industrial metals traded on the bourse this year and prices will drop as much as another 17 percent to $12,000 by the end of the quarter, according to the median of 12 analyst and trader estimates compiled by Bloomberg.

The metal’s retreat compares with a 1.6 percent decline in the Standard & Poor’s GSCI index of 24 commodities since the start of January. The Bloomberg U.S. Treasury Bond Index lost 2.1 percent and the MSCI All-Country World Index of equities advanced 17 percent.

Global nickel supply will exceed demand by 100,000 tons in 2013, with a surplus of 40,000 tons in 2014, according to Jim Lennon, a senior consultant to Macquarie Group Ltd. Barclays Plc projects an excess of 86,000 tons next year and Societe Generale SA 32,000 tons. Morgan Stanley predicts 49,400 tons and called NPI “the largest threat to the global primary nickel market” in an Oct. 7 report.

Electric Furnaces

Production from China’s most advanced rotary kiln electric furnaces reached 50 percent of NPI output this year and will rise further, said Fan Runze, an analyst in Beijing at Antaike, a unit of the China Nonferrous Metals Industry Association.

Output by traditional blast furnaces dropped to 10 percent of total supply while electric arc furnaces provided the remaining 40 percent, he said. Rotary kilns use 40 percent less electricity than older furnaces, according to Fan.

OAO GMK Norilsk Nickel, the largest producer, will report a 5.3 percent decline in profit to $2.06 billion this year, according to the mean of 10 analyst estimates compiled by Bloomberg. Shares of the Moscow-based company, which derives 43 percent of its sales from nickel, fell 14 percent to 4,832 rubles this year. The stock will rebound to 5,727 rubles in 12 months, the average of seven forecasts shows.

Anton Berlin, the marketing director of ZAO NormetImpex, a unit of Norilsk Nickel, estimated about a month ago that as much as 40 percent of global production is unprofitable. Nickel stockpiles in warehouses monitored by the LME jumped 65 percent this year to a record 230,760 tons.

Export Ban

More supply will come in the next several years from projects including Glencore Xstrata Plc’s Koniambo, Anglo American Plc’s Barro Alto and Vale SA’s Onca Puma. Global mine supply won’t contract until 2018, Morgan Stanley estimates.

China’s NPI production may be disrupted by less supply of ore from Indonesia, where the government has proposed an export ban to promote domestic processing. Indonesian imports accounted for more than half of the lower-grade feedstock needed for NPI in the first eight months, customs data show.

Macquarie’s Lennon, who has followed nickel for more than three decades, said at a September conference in Jakarta that the chances of a total ban were low because it would destroy jobs in producing regions just before elections.

Indonesia roiled the tin market this year by obliging all metal for export to be traded through a local exchange, challenging the LME’s dominance. Prices surged 27 percent in three months. PT Timah, Indonesia’s largest producer and shipper, declared force majeure on cargoes and the nation’s monthly exports in September slumped to the lowest since at least February 2007, when the government began monitoring sales.

Selective Ban

A selective ban on companies that haven’t shown progress in plans to build local nickel smelters is possible, Deutsche Bank AG analysts including Michael Lewis wrote in a report Sept. 26. Three Chinese companies signed agreements to build NPI plants in Indonesia and one has begun construction, Fan of Antaike said.

Chinese mills are likely to turn to the Philippines for low-grade feedstock if shipments from Indonesia are interrupted, according to Fan. He said ore stockpiles at Chinese ports were big enough to meet several months of demand. China now produces about half the world’s stainless steel, from less than 13 percent in 2005, according to data from the International Stainless Steel Forum in Brussels.

“The industry is on the road to NPI and it’s irreversible,” said Ren Gang, who buys and sells metals in Shanghai for Qingdao Youbangyuan Trading Co. “It’s all about costs and orders coming from clients.”

--With assistance from Agnieszka Troszkiewicz in London. Editors: Brett Miller, Sungwoo Park, Jarrett Banks

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