Nickel Glut Ending as Goldman Sees Rally on Ore Ban: Commodities

Jan 28, 2014 1:36 pm ET

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Jan. 28 (Bloomberg) -- Agus Suhartono shipped more than 2 million metric tons of Indonesian nickel ore last year to meet demand in China for nickel pig iron used in stainless steel. Now, he can’t load cargoes and may lay off some of the 1,400 workers at a mine in the North Konawe Regency of Sulawesi.

Suhartono, the chief operating officer for Ibris Nickel Pte., said 1 million tons sit in 5,000-ton heaps awaiting shipment after Indonesia, the world’s largest nickel-ore producer, banned exports this month. The government is trying to transform the nation’s mineral industry away from raw-ore sales by forcing more investment in smelters and refineries to process commodities into higher-value products.

“We are not allowed to export,” said Suhartono, whose company is planning a $1.8 billion smelter project. “What should we do? We are not a non-profit institution.”

Reduced sales from Indonesia, which feeds about 14 percent of global refined-nickel output, may erase a surplus and create an output deficit by 2015, reviving prices that last year fell more than any other base metal. Bank of America Corp. on Jan. 23 forecast nickel on the London Metal Exchange will average $17,000 a ton by the fourth quarter, up 20 percent from now.

Nickel prices that reached a record $51,800 in 2007 fell 19 percent in 2013, a third straight drop, as China expanded supply of nickel pig iron, a lower-grade substitute for refined metal used in making some types of stainless steel. After China developed the smelting technology to produce nickel pig iron profitably, output reached 480,000 tons last year, or 24 percent of the nickel market, compared with 180,000 tons in 2010, or 13 percent, according to Goldman Sachs Group Inc.

‘Profound’ Impact

While inventories monitored by the LME are the highest on record, the Indonesian ban halts the primary source of the raw material that helped fuel the nickel glut and sent prices tumbling. Stockpiles in China, which gets most of its supply from Indonesia, may last only about six months because processors have few alternative suppliers, a Bloomberg survey of nine smelters, mining executives and analysts showed Jan. 17.

“The fact that it’s basically zero exports of ore is profound,” said Mark Selby, senior vice president of business development at Royal Nickel Corp., a Toronto-based company that is developing the Dumont mine in Quebec.

Raise Value

Nickel rose 1.7 percent this year to $14,140, the only gain among six base metals traded on the LME. The Standard & Poor’s GSCI Spot Index of 24 raw materials lost 1.4 percent, while the MSCI All-Country World Index of equities fell 3.5 percent. The Bloomberg Treasury Bond Index advanced 1.2 percent.

The price of nickel may average $15,000 a ton this year and $16,500 in 2015, according to the median of nine analyst estimates compiled by Bloomberg. Goldman boosted its 12-month forecast to $16,000 in a Jan. 21 report, saying nickel is among the bank’s top metals picks for 2014.

The ban imposed by President Susilo Bambang Yudhoyono on Jan. 12 reinforced a 2009 law that called for greater state benefit from the industry and local metals processing. The government first limited exports in 2012 and then faced a series of legal challenges. Bank of America says the country’s ore accounts for 14 percent of global nickel production.

Indonesia also halted shipments of bauxite used for aluminum, while allowing exports of copper concentrate for three years. The country accounts for as much as 10 percent of global aluminum supply from bauxite and 3 percent of copper, Goldman said.

Global Deficit

The global nickel surplus will shrink to 41,000 tons this year from 181,000 tons in 2013, and reach a 36,000-ton deficit in 2015, the first shortage since 2010, Barclays Plc said. Goldman said the deficit will be 51,000 tons next year.

Production of nickel pig iron in China will slump 17 percent to 400,000 tons this year, Macquarie Group Ltd. said in a Jan. 17 report. Ore prices in China may surge more than 50 percent, boosting the breakeven cost of making nickel pig iron from $12,000 a ton to more than $15,000, it said on Jan. 14.

Before the Indonesian ban was imposed, traders and Chinese producers of nickel pig iron boosted ore stockpiles to as much as nine months of demand, compared with two normally, Australia & New Zealand Banking Group Ltd. estimated on Jan. 14. That means the export halt probably won’t have an immediate impact, Morgan Stanley said in a report on Jan. 22, listing nickel as its least-favored base metal this year.

Overturning Ban

Stockpiles monitored by the LME are up 77 percent in the past 12 months to an all-time high of 264,288 tons, exchange data show. Inventories almost tripled since the end of 2011 as output of nickel pig iron eroded demand for refined metal.

Indonesia may overturn the ban, especially if there are tens of thousands of job losses during an election year. The rally in prices will probably be short-lived, lasting three to six months, depending on how long the curb remains, said Justin Smirk at Westpac Banking Corp., the most-accurate nickel forecaster tracked by Bloomberg over the past eight quarters.

The government may find a compromise that allows some ore exports and ensuring job security at the mines, said Stephen Briggs, a senior metals strategist at BNP Paribas SA. With big inventories in China, the full impact of the ban won’t be felt until the second half of the year, said Briggs, the second-most accurate nickel forecaster tracked by Bloomberg.

“A way around this will be found,” Briggs said in an interview from London.

Election Pressure

Indonesia will hold two elections this year, with polls for parliament due in April followed by a presidential contest in July. President Yudhoyono, who can’t run for a third term, may revise the ore-processing requirements before the first set of elections, Eurasia Group analysts Shaun D. Levine and Divya Reddy wrote in a Jan. 14 note.

“The ban is there, but that doesn’t necessarily in my mind mean to suggest it will stay exactly like that forever,” said Andrew Shaw, head of base metals research at Credit Suisse Group AG. The government may allow companies that are investing in refineries or smelters to resume exports of unprocessed ore before those projects are completed, he said.

Ibris plans to build its smelter in Southeast Sulawesi that would start producing in 2017, and the Singapore-based company expects the government to tweak the rules to allow raw-ore shipments to restart within three months, Suhartono said. Three months is probably as long as the company can wait to determine the fate of its workers and the smelter project, he said.

“Workers are doing maintenance on stockpiles, especially now during the rainy season, so that we don’t pollute the environment,” Suhartono said. “The rest of them are on standby in the office or at home, mostly just taking a break.”

Preserve Incentives

While the ban probably will be relaxed this year, the government is expected to replace it with a tax of more than 50 percent for companies building plants, Goldman predicted. The adjustment would minimize job losses and permit some ore exports while preserving incentives for companies to construct processing plants, the New York-based bank said in a Jan. 21 report. Prices may drop from mid-late 2015 as furnaces are built in Indonesia, it said.

The Indonesian Association of Mineral Entrepreneurs lodged a request at the Constitutional Court in Jakarta on Jan. 16 to revise the articles of the law that govern the curb, according to Refly Harun, a lawyer representing the petitioners. The articles don’t require a ban, Harun said. Ibris’s Suhartono is vice president of the group.

Few Alternatives

Alternatives to Indonesian ore will be hard to find. The purity of supply from the Philippines, the second-largest producer, is 1.5 percent nickel, below the 1.8 percent to 2 percent of Indonesian ore, according to Citigroup Inc. About 60 percent of output from the Philippines is used solely for iron, with no nickel recovery, Macquarie said.

Global demand for nickel may climb 7.1 percent to 1.908 million tons this year, according to Barclays, which forecasts prices of $15,000 in 2014 and $17,000 in 2015. Some stockpiles tracked by the LME may be eroded should Chinese output of nickel pig iron decline, spurring demand for imported refined metal, Barclays said in a Jan. 13 report.

On the LME, canceled warrants, or orders to remove metal from warehouses, have risen more than fivefold to 102,000 tons over the past year, or about 39 percent of the stockpile.

Refining Reduced

Some producers of refined metal also cut output after the drop in prices. Glencore Xstrata Plc, the metals producer and commodity trader, suspended work at its Falcondo mine in the Dominican Republic in October. Votorantim Metais, a unit of Votorantim Group, halted output at its Fortaleza smelter in Brazil.

World refined output will contract 0.7 percent this year, the first decline since at least 2009, Goldman forecasts.

“One way or another, you’re getting a less oversupplied market,” said Michael Widmer, an analyst at Bank of America Merrill Lynch in London who’s been bullish on nickel for about a year. “If Indonesia cuts exports, that would rebalance the market. If Indonesia doesn’t cut exports, then the big producers in the world outside China would basically cut production.”

--With assistance from Yoga Rusmana in Jakarta, Liezel Hill in Toronto and Alfred Cang in Shanghai. Editors: Jake Lloyd-Smith, Steve Stroth