London 15/03/2016 - Major production cuts in nickel and a substantial drawdown of exchange inventories are needed to trigger a sustained price recovery, Norilsk Nickel said.
Three-month LME nickel fell below $8,000 per tonne to the softest since 2003 before recovering to trade recently at $8,650, but sentiment remains weak amid oversupply and poor demand issues.
The downturn was exacerbated by a 50-percent surge in speculative LME short positions and record-high speculation in physical metals, with LME and SHFE combined metal trading volumes in 2015 exceeding the physical market size by almost 250 times, Norilsk said in a financial release on Tuesday
At least 20-25 percent of global supply needs to be cut for the price to enter into a sustained recovery, it added, while acknowledged that there has been a pick-up in nickel restructuring in 2016 - some production cuts have already been announced, particularly in China.
As well, a substantial number of high-cost nickel operations have been put up for sale, it added.
The producer expects a further contraction of nickel pig iron (NPI) output of around 85,000 tonnes in 2016 which will be driven by high costs, a lack of feed and tightening environmental regulations.
As well, several non-Chinese high-cost producers with combined capacity of around 200,000 tonnes per year are also at risk of shutdowns. Votorantim, Panoramic and Mincor Resource have already announced closures
Norilsk sees a deficit of 70-90,000 tonnes for 2016 although global primary nickel consumption should remain unchanged in 2016 at around 1.9 million tonnes.
"As the global nickel exchange inventory runs at historical highs of approximately 500,000 tonnes, we feel that the price reaction to production cuts could be sticky until a major drawdown of inventories is materialised," it said.
Still, the current spot nickel price is unsustainable in the long-run - Norilsk does not see much further downside because the price is already extremely deep into the cost curve.
"With the dollar strengthening/mining currencies depreciation as well as oil price having stabilised by now, we believe that further reduction of the cost curve should end by and large - and thus the lowering of the support for nickel price," it said.
Full-year Ebidta at the world's largest refined nickel producer fell 24 percent to $4.296 billion, down $1.385 billion from 2014, with weak nickel prices eating into its profit margins.
Nickel remained the largest contributor to the company's revenue, accounting for 38 percent of total metal sales in 2015, down from 43 percent in 2014.
In 2015, its nickel revenue fell 35 percent year-on-year to $3.01 billion primarily due to lower nickel price and sales volumes.
In other metals, copper sales, which accounted for 24 percent of its total metal sales - fell 22 percent to $1.916 billion from $2.468 billion, primarily due to the lower average realised copper price and lower sales volumes.
Palladium sales, which accounted for 23 percent of total metal revenue, fell 19 percent to $1.807 billion from $2.221 billion, driven by lower sales and prices, while platinum revenue fell 27 percent to $631 million from $869 million.
(Editing by Mark Shaw)