London 08/02/2016 - Supply of off-grade nickel is becoming increasingly difficult to source on a spot basis, traders in Europe and China told FastMarkets, with most immediately available material for first and second quarters already sold out.
Stainless steel producers in China have been turning to alternative off-grade nickel products to supplement production for some time now, but with nickel pig iron (NPI) stocks now increasingly scarce due to export restrictions in Indonesia - producers have been quick to buy up supply of ferro-nickel to continue to produce cheaper stainless steel.
"Now that the Chinese have completely eaten up all their NPI and the Indonesians still can’t export, there’s tightness in NPI, so they’ve turned to ferro-nickel, which has now got tight too for the first quarter, so that could be good," a trader told FastMarkets.
According to ISO standards, ferro-nickel must contain a minimum of 15 percent nickel content, NPI traditionally ranges anywhere from six percent up to 15 percent content.
NPI was invented in China as a cheap alternative to the more expensive pure nickel cathodes as a way of supplementing production of stainless steel but Chinese NPI production is steadily falling, while imports of ferro-nickel are rising.
In January 2014, Indonesia implemented a ban on the export of certain unprocessed raw materials including nickel-containing ores - its intention was to encourage vertical integration among domestic producers and to add value to its mineral ores via the establishment of processing facilities in the country.
Chinese stainless steel producers had however long utilised cheaper nickel pig iron stocks that built up before Indonesia introduced the ban - but these stocks have almost depleted.
Ore supply from the Philippines - which has become the biggest nickel laterite supplier to China - has picked up some of the slack left from the Indonesian export ban and limited some of the downside but the huge NPI sector is struggling to get hold of the material it needs to continue to run at full capacity.
Additionally, nickel ores imported from Indonesia and the Philippines generally supply different customers given that the higher grade Indonesian material is better suited for rotary kiln and submerged arc furnaces, while the lower grade ores from the Philippines are used in blast furnaces.
Thus, the next cheapest alternative to refined nickel for the stainless steel producers is ferro-nickel. In fact, traders now say that ferro-nickel - which usually trades at a discount - is now trading at a premium, with demand for the alloy so high.
It's a similar story in Europe, with traders suggesting that they are getting increasingly more and more requests for non-deliverable material in central Europe.
"Specific grades are getting a bit tight in Europe now, non-deliverable material certainly," a trader in Geneva said.
Still, traders were quick to dismiss this as a bullish sign for the refined nickel market, suggesting that the huge amount of supply of the metal in Europe will cap any upside, should steel producers be forced to buy up more pure nickel in the face of a tighter off-grade market.
"I don't think this means we'll see anything positive in relation to price, there's still a lot of supply around Europe, it's just encouraging for fundamentals," another European trader said.
Of the 280,722 tonnes of nickel currently stored on-warrant at LME-registered warehouses, nearly 30 percent is held in European warehouses.
Still, the low price has also affected the competitiveness of Chinese nickel pig iron (NPI) producers, which traditionally have been able to undercut the price of refined metal.
Nickel traded under $8,000 per tonne on the benchmark three-month contract on the LME on Monday, the first time in 12 and a half years - thin trading conditions were said to have exacerbated the downside move, with China currently observing it's Lunar New Year festival.
(Additional reporting by Vicky Chen, editing by Tom Jennemann)