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Tom Price, Global Commodities Analyst from UBS Australia shares with us UBS’ outlook on the trend in the nickel market*.
Nickel’s recent spot price history features a trend-decline of 50% to US$6/lb, during 2011-13 – thereafter contained within a surprisingly volatile-free, tight trading range of just US$6.0-6.6/lb. Indeed, since 2011, this has been one of the worst price performances of the base metals complex, sadly comparable with that of the inventory-choked global aluminium trade.
Factors that have weighed on nickel’s price include a massive project overhang (UBSe forecasts +200kt, representing about 10% of existing production capacity, entering the trade); until recently, Indonesia’s support of China’s nickel-pig iron industry, with its massive nickel-bearing laterite trade; the rapid development of low-cost laterite processing capability in China (RKEFs); and weak stainless steel (first-use of 70% of primary nickel) demand growth in Europe and the US.
All of these factors have undermined nickel’s price, reflected in record-high metal inventories, a collapse in merchant premia, and a forward curve in perpetual contango.
Upstream, primary nickel producers of the world have universally reported relentless margin squeezes and difficulties in cutting costs, particularly among laterite-exposed players. We have seen projects delayed and new operations executing slow ramp-ups, all as a way to manage a weakening nickel price. Significantly, there have been no substantial production cuts. Why? Companies are trying to avoid exercising this final expensive option, hoping instead for a late-stage price recovery.
It’s now 2014, and that recovery appears to have arrived. Nickel’s price has lifted 20% from January’s local-low of US$6.10/lb to a March-high of $7.30/lb. The rally has surprised many following this tiny metal market’s plight. Investors are now returning to follow nickel-exposed equities.
What has occurred to prompt nickel’s price reversal? A wide range of trade drivers have materialised in Nickel World, including major supply-side events:
1. Indonesia’s formal ban of nickel-bearing laterite exports (imposed Jan-14; effectively terminates almost 20% of the short-term global primary mine supply);
2. first sanctions imposed on Russia (further economic sanctions could threaten 11% of global primary mine & refined supply);
3. key operations/projects struggling (Koniambo, 60ktpa; VNC, formerly known as ‘Goro’, 60ktpa; Onca-Puma, +50ktpa; Ramu, 33ktpa; Ambatovy, 60ktpa…);
Historically, a nickel price surge on one-or-more supply-side events has rarely been an extraordinary event. That’s because it is a tiny metal trade – volumes of primary metal are about 10% of copper’s; 4% of aluminium’s – making it vulnerable to relatively modest shifts in supply.
So why are we warming to nickel now? It’s the emerging, apparently sustainable, broad-spectrum demand-side activity that has attracted our attention.
Surprisingly, this activity is not centred on China. In fact, China’s extraordinary decade-long stainless steel production capacity growth story – delivering half the world’s capacity – finally seems to be slowing. Who else then drives nickel’s demand growth? For the first time in many years, we are hearing of rising alloy surcharges and scrap prices in the US and Europe. So demand growth is being pushed along once again by the traditional stainless steel-producing centres, on improving economic growth.
We recently moved nickel higher in our commodity top-picks list (Transit Lane, 14-Jan-14), based largely on supply-side constraints and emerging demand growth in mature economies. Again, its price has performed much better in 2014Q1 than we expected. We now recognise new upside risks to our published forecast, even after its recent rally.
We forecast a market moving from surplus-to-balance during 2014-15. This condition should be supportive of a nickel price above US$7.0/lb ($15,400/t). We maintain a medium to long-term price outlook of $7.2-8.2/lb ($15,870-18,100/t). This view is in-line with the industry’s current marginal cost of production (at the 90th centile) of $7.95/lb ($17,530/t). The greatest risks to any bullish outlook for nickel include constraints on credit and property sector activity in China, faltering economic growth in the US and Europe, as well as an excessive supply-side response to nickel’s price rally.
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