Nickel’s Roller-Coaster Tumble Seen Extending to Goldman

May 15, 2014 11:57 pm ET

(Updates prices in fifth paragraph.)

May 16 (Bloomberg) -- Nickel’s roller-coaster ride this year isn’t over, according to Goldman Sachs Group Inc., which expects the highest prices in two years to prompt expanded capacity for smelting and discourage purchases by steelmakers.

Prices plunged 11 percent the previous two days, and probably will fall 15 percent further in 12 months to $16,000 a metric ton, Goldman forecasts. Nickel had surged this year following a January ban on ore exports by Indonesia, the world’s largest supplier from mines, and as threats increased for economic sanctions against Russia, home to OAO GMK Norilsk Nickel, the biggest producer of refined metal.

Instead, exchange-tracked inventories rose, prompting some investors to judge the rally was exaggerated. China will “aggressively” build blast-furnace capacity in Indonesia to produce nickel pig iron, a low-grade alternative to refined metal, Goldman said in a report dated May 14 and e-mailed yesterday. Waning demand for the metal from makers of stainless steel is another “downside risk” for prices, the bank said.

“High prices will incentivize a substantial build out of blast furnace and other smelting capacity in Indonesia,” Goldman analysts Roger Yuan, Max Layton and Jeffrey Currie wrote in the report. “Demand destruction could also help to balance the global market in 2015 if the ban is not relaxed during the smelter construction period.”

Nickel for delivery in three months on the London Metal Exchange rose 0.7 percent to $18,888 at 12:36 p.m. in Tokyo, trimming its weekly drop to 5.1 percent, the biggest such loss since February 2013. On May 13, the price reached $21,625, the highest since February 2012.

Processing Plants

With construction taking about 12 months, the effects of “de-bottlenecking” will be seen in mid-2015, the Goldman analysts wrote. Nine nickel-processing plants may be completed this year in Indonesia, and as many as 40 more by 2017, according to the Energy and Mineral Resources Ministry. The country imposed the ban in a bid to transform the mineral industry away from raw-ore sales into higher-value processed products.

This year’s rally could shrink profits in the stainless steel industry, encouraging substitution, Goldman said. A 5 percent substitution would be equal to a reduction of as much as 150,000 tons of nickel demand, the bank estimates.

While Goldman expects prices to fall in 12 months, the bank predicts a gain to $22,000 in three months and six months, as the risk from demand destruction is in the “medium term,” the analysts said.

Steel Products

Stainless-steel products are made with certain specifications that can’t be altered, making it impossible to replace nickel in the mix, Jason Martineau, the national sales manager at Penn Stainless Steel Products Inc. in Quakertown, Pennsylvania, said in a telephone interview.

Nickel’s open interest, or the number of contracts yet to be closed, liquidated or delivered, has surged for five straight months to a record 319,422. The jump is “reflecting the extreme nature of change that the nickel market is facing with the Indonesian export ban,” David Wilson, an analyst at Citigroup Inc. in London, said in a telephone interview this month.

Prices may top $30,000 in 2015, according to Citigroup, which last year correctly predicted that Indonesia would implement the export ban.

China Demand

Chinese stainless-steel demand is weak and few expect a recovery in prices until next year, Credit Suisse Group AG said in a report today. Most producers lost money in the first quarter, according to the bank.

The price gap between locally produced nickel in China and LME futures narrowed this week, indicating that further increases in imports of the refined metal are likely, according to Beijing Antaike Information Development Co.

Even as the U.S. and Europe threatened more sanctions after Vladimir Putin’s incursion into Ukraine and the international condemnation that followed, it didn’t put a dent in Russia’s exports of raw materials. The country exported 51,600 tons of nickel in the first quarter, similar to the same period last year.

The plunge “illustrates the extent to which speculation was apparently responsible for driving up the nickel price,” Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, said in a report. “The correction process could well continue for the time being.”

Copper in London was little changed at $6,878 a ton, heading for a second weekly gain. The contract for delivery in July on the Comex in New York was little changed at $3.146 a pound. In Shanghai, futures for delivery in August slid 0.6 percent to 48,390 yuan ($7,765) a ton.

On the LME, zinc climbed, while lead and tin dropped. Aluminum was little changed.

--With assistance from Jae Hur in Tokyo.