What to make of the nickel market? This time last year it was roaring up, fuelled by the growing certainty of a ban on the export of ore from Indonesia. That matters because that ore is the feedstock for the production of nickel pig iron to satisfy the demands of the Chinese stainless steel industry. The market sailed through $20000, and there were plenty of people on hand to tell us it was heading higher and higher, even, said some, going to threaten the all-time highs around $50000. As we all know now, that didn’t happen; indeed, the market in the end headed right back down again, but even so the bulls still found it hard to believe and plenty were advising against forward sales for the 2015 year. Well, we’re only a quarter of the way through the year, so they may yet turn out to be right. Mmm.
I’m not convinced, though, for a few reasons. First, as I have written before, the Indonesian ore ban is a temporary factor. I don’t mean it will be lifted, but rather that its effect will die. Why? Well, very simple really. The Indonesian government are not stupid or biting their communal noses off to spite their faces; they don’t want to stop exporting minerals to generate foreign exchange earnings. They only want to stop the simple sale of unprocessed, basic ore. The bottom of the value chain, in other words. What they want is to see their natural resources generating employment and added value within their own economy, rather than giving all that value to China. So ore processed into products higher up the value chain - in this case NPI - will indeed be exported. It’s just that instead of the diggers loading it straight into trucks and then ocean vessels, they will be transporting it to local furnaces for transformation. So the only real effect is one of timing - the ore ban came in before new plants had been built, creating a bottleneck. However, that is already easing as local production is ramping up. Ultimately, in fact, copper will be the same - Freeport and Newmont, for example, are already committed to more local smelting. It’s a classic shift from an economy purely dependent on raw material export to one where value is added at source. (There is, incidentally, an interesting discussion for another time as to whether this may be marking the beginning of the eventual decline of the custom smelter dependent on the sea-borne trade in ore and concentrate; after all, that is actually a relatively recent phenomenon.) So I would suggest that the ore export ban is no more than a short-term hiccup, whose influence declines over time.
Then what else? Well, the LME stocks keep going up. At first, we were told that this was just another manifestation of the Qingdao problems; that traders had financed stock there which, after the revelations of difficulties, had to be moved for security reasons into LME warehouses. Mmm. I find that one tough to believe when nickel stocks are at around 450000mt - that’s an awful lot of financed stock. I suspect that a far stronger argument for the existence of that stock has to do with stainless steel demand; with that decline, it’s quite difficult to see a sustained rally in the nickel price.
Those two issues are, I would suggest, reasonably uncontentious. The last point is perhaps somewhat more controversial and involves taking a leaf out of the oil and iron ore trading handbook. What’s happening there is that those producers comfortably low on the cost curve are flexing their muscles, to the detriment of their higher-cost competitors. It’s a classic technique - in a weak market, if you are the cheapest producer you can sustain lower prices more easily and for longer than the others. So why not do it? Keep producing, keep selling as the price drops and squeeze the life out of the competition. Make sure those “attractive” new deposits remain no more than a twinkle in the eye of the junior miners. Then, when you’re certain you’ve bought your market share, you can go and play in the option market.
There is definitely one nickel producer who has he market strength and position to do that. Will they, thus putting a further strain on the price? Or are the stock levels in fact showing us they are already following this route?