Can nickel recover from its spectacular boom and bust?: Andy Home
By Andy Home
LONDON, Nov 3 (Reuters) - Nickel's recent fall from grace has been as spectacular as its earlier rise.
At the May peak of its super-charged rally the London Metal Exchange (LME) nickel price was up almost 50 percent on the start of the year at $21,625 per tonne.
At its nadir last week the price of the stainless steel input touched a low of $14,690 per tonne.
The capitulation has reflected an almost complete unravelling of this market's much-hyped bull narrative.
It was Indonesia's largely unexpected decision to make good on its promise to halt all exports of unprocessed minerals, including nickel ore, that triggered the bull surge.
That part of the story still holds true. Indonesia's authorities haven't blinked. The ban remains in place.
But nothing else has gone as expected.
The ban hasn't caused the mass closure of China's nickel pig iron (NPI) producers. Nor has there has been any palpable tightening in the supply chain.
Quite the reverse, in fact, as LME warehouse stocks rise ever higher with metal pouring out of Chinese warehouses into the LME system.
Battered bulls have fled the battlefield, leaving behind the vestiges of previous exuberance in the form of December call options stretching all the way up to the $30,000 strike. <_0MNIZ4>
So is that it for nickel, a fast-forward tale of boom and bust that has played out in the space of just a few months?
Actually, there are reasons to believe not but understanding why means understanding what went wrong with what at one stage looked like a one-way bet.
EXIT INDONESIA, ENTER THE PHILIPPINES
Part of the appeal of the bull narrative in nickel was its simplicity.
Indonesia had emerged as the major supplier of nickel ore to China's many NPI producers, who had collectively created a whole new nickel supply stream for the country's massive stainless steel sector.
So when Indonesia cut off that ore flow in January, it seemed inevitable that there would be a knock-in effect on China's NPI output, both in terms of volume and production cost.
Sure, everyone knew Chinese players had accumulated nickel ore stocks before the ban but this cushion was expected to deplete quickly if Indonesia stuck with the ban, as it has done.
What no-one expected was that the Philippines, traditionally the second-most important source of nickel ore for China, would lift production and exports to the extent that it has. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's imports of nickel ore: http://link.reuters.com/hyv33w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
And although the quality of that ore is lower than Indonesian material, NPI producers have learnt how to blend it with their stockpiled Indonesian ore, extending the life of those inventories.
After falling sharply in the first quarter of 2014, nickel
ore stocks at major Chinese ports
There has consequently been no mass shuttering of NPI capacity in China, just a marginal contraction among the highest-cost and worst-polluting entities.
Back in February analysts at Macquarie Bank, one of nickel's bull cheerleaders, expected NPI output to contract from around 500,000 tonnes in 2013 to 395,000 tonnes this year and to 150,000 tonnes in 2015.
The bank's latest forecasts are for production of 470,000 tonnes this year and 375,000 tonnes next year. ("The nickel roller coaster", Oct. 3, 2014).
THE QINGDAO EFFECT
With signs of any stress in the nickel supply chain lacking, LME stocks have kept rising.
Today's exchange report showed another 2,334 tonnes entering the system, taking the headline figure to yet another all-time high of 385,314 tonnes. LME stocks are now up by around 124,000 tonnes, or 48 percent, since the start of January.
Part of this rise, however, resulted from a completely unexpected development.
When news first broke in June of a potential scandal concerning the multiple pledging of metal for loans at the Chinese port of Qingdao, it was the copper market that swooned.
But in the event the real impact was felt in the nickel market as metal fled China's bonded warehouse zones for the safer haven of LME storage.
The country, traditionally a steady net importer of refined nickel, flipped to net exporter from June onwards. Cumulative exports of almost 54,000 tonnes over the June-August period eclipsed the total annual level of exports in each of the last three years.
The existence of hidden off-market nickel stocks in China was widely known. It's just no-one was expecting them to reverse-flow out of the country to the extent they have done.
The inexorable rise in LME warehouse stocks, meanwhile, has been a daily unwanted reminder of surplus in a market which was trading a deficit story.
ACCELERATORS
As the nickel rally first stalled and then started crashing, two downside accelerators kicked in.
The first was a stampede for the exit by investors who had piled into the market when it was glowing white hot earlier in the year.
The LME's commitments of traders reports show money managers, just one part of the broader exchange investment landscape, cutting their net long positioning by 58,000 tonnes in the space of just three weeks in September.
The second was the reaction by the physical stainless steel supply chain, where pricing is umbilically linked to the nickel market by the nickel surcharge.
Falling nickel prices encouraged both destocking of existing product and the withdrawal of new orders as stainless steel operators looked to clear their books of higher-priced material and restock at lower prices.
In other words, paper market collapse has intertwined with physical market collapse, each feeding off the other.
HERE COMES THE RAIN
The worst of the storm may now have passed.
LME stocks are still rising but Chinese exports noticeably slowed in September to just under 10,000 tonnes. That's still a high figure by historical standards, but there is a sense that what needed to move out of China has largely now done so.
The hot money rout on the LME also seems to have ended. The latest exchange report for the week to Oct. 24 showed money managers increasing their net long position back over the 12 percent threshold for the first time since September.
The LME price seems to have run out of downside momentum, recovering to the $15,780 level at the end of last week.
Any further gains will likely see destock turn to restock in the stainless sector, this industrial price accelerator turning from negative to positive.
But what of Chinese NPI production, which is where this story of boom and bust originally started?
Well, the resilience of China's NPI producers is about to be put to the test.
The emergence of Philippine supply to plug the gap left by Indonesia has instilled a completely new seasonal dynamic to the nickel market.
That's because both production and exports in the Philippines tend to contract sharply during the rainy season, which runs from December through March or April, a pattern that is clear to see in the graphic below. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on seasonality of Chinese imports of Philippine ore: http://link.reuters.com/jyv33w Graphic on LME nickel price and Chinese nickel ore price: http://link.reuters.com/qaw33w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Since the Philippines is now the only large-volume source of ore for Chinese NPI producers, the logical inference is that reduced flows over the next few months will mean heavier draws of existing nickel ore stocks.
The key signal will be the price of nickel ore in Chinese ports.
It has mirrored the LME price roller coaster this year, albeit in amplified form. At its May peak of over 1,000 yuan per tonne, for example, the ore price had more than doubled in the space of four months. It too, though, has collapsed since then and is currently quoted at 555 yuan by data provider Asian Metal.
If China gets through the Philippine rainy season without that ore price moving, then you'll know it's the end of the nickel bull story. If, however, the ore price starts reacting, it'll be a sign that another chapter is opening. (Editing by David Evans)
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