Opinion pieces are the views of the author: they do not represent the views of FastMarkets
Singapore 14/09/2016 - China's nickel pig iron (NPI) production is proving more resilient than anticipated, which does not bode well for nickel in the near term.
The drop in Chinese NPI output so far this year has not been as bad as expected - or at least it remains within market observers' expectations - despite initial concerns over production disruptions caused by environmental checks in China and the Philippines' mining review.
China's NPI production in July-August was affected when Beijing sent environmental authorities to major production bases including Inner Mongolia, which resulted in smelter stoppages.
But the smelters are starting back up, with Shanghai Metals Market expecting Chinese NPI output to increase 11.5 percent month-on-month to 33,000 tonnes (contained nickel) in September.
Amid the disruptions in July and August, Chinese NPI fell 8.8 percent year-on-year to 248,400 tonnes, according to data compiled by the Chinese metals research firm.
The year-to-date decline in production so far is in line with what analysts had predicted earlier this year - prior to the environmental checks in China and the mining shake-up in the Philippines.
ICBC Standard Bank estimated in May that Chinese domestic NPI output would drop nine percent to around 350,000 tonnes this year. Beijing Antaike also predicted a drop Chinese NPI output of 35,000 tonnes this year to 350,000 tonnes and has not since revised its forecast.
The anticipated drop of more than 30,000 tonnes this year also looks set to be made up by ferronickel/NPI imports from Indonesia.
Ferronickel/NPI imports to China from Indonesia were up more than four-fold year-on-year at 390,706 tonnes in January-July. While Chinese customs do not break the data down by nickel content, much of the exports are likely to be from Tsingshan Holding's NPI projects, which has reached total capacity of 900,000 tonnes per year so far and has nickel content of 10 percent.
Based on 10-percent nickel content, Chinese ferronickel imports have arguably surpassed 40,000 tonnes (nickel contained) already so far this year.
NICKEL ORE, STOCKS
Earlier concerns over disruptions to Philippine nickel ore production that had sent nickel prices 30 percent higher between June and August have also proven to be overblown - no major producers have been affected so far. In response, three-month LME nickel eased from mid-August to below $10,000.
It rebounded above $10,000 early in September when Filipino authorities warned that more mining suspensions are likely when it completes its audit report. Still, industry watchers such as China's Huatai Futures do not believe that major miners will be affected.
"It will be very hard for the results from the Philippine mining audit to exceed expectations," it said in a report on Monday. "It is difficult for the rebound in nickel price to develop further as it is unlikely for the logic behind this rebound to develop further. This rebound is not what we would want to capitalise on."
The LME nickel price has since eased below $10,000 - it recently traded at $9,895 per tonne, up $35 on Tuesday's close.
China does not seem to be facing a nickel ore shortage - Chinese port stocks are around 14 million tonnes, according to Antaike, up from around 13 million tonnes in mid-July and covering two or three months of usage.
Nickel metal stocks in Shanghai Futures Exchange-registered warehouses and bonded stocks in Shanghai are also rising. Shanghai bonded stocks rose 14,000 tonnes month-on-month to 74,000-84,000 tonnes at the end of August, according to FastMarkets' survey.
Nickel stocks in SHFE warehouses have risen three percent or around 3,000 tonnes over the past month to 112,072 tonnes as of September 9. At the start of the year, stocks were close to 50,000 tonnes.
In LME-registered warehouses, stocks have mostly trended lower since the start of this year but remain high at 367,728 tonnes as at September 13.
BRIGHT SPOT
But there are also bright spots for nickel. One is stronger-than-expected Chinese stainless steel production.
Late last year, analysts were predicting flat growth for Chinese stainless output for 2016. By mid-year, forecasts were upgraded to growth of a few percent after demand exceeded expectations.
Analysts have recently upgraded their outlooks once more after forecast-beating demand growth, again driven by strong stainless steel exports and growth in domestic property construction, with some seeing full-year output of the high-nickel 300-series stainless grade rising as much as 10 percent.
Production of 300-series, which accounts for 70 percent of total output, rose 7.9 percent year-on-year to 6.1 million tonnes in the first half of this year.
UNCERTAINTIES INTO 2017
Still, nickel's outlook into 2017 is clouded. Environmental standards could become more stringent in China and the Philippines, raising the likelihood of production disruptions in Chinese NPI and Philippine nickel ore output, most analysts agree.
Indonesia NPI production should rise further when more projects are commissioned - Tsingshan itself has another 600,000-700,000 tonnes per year of NPI capacity under construction, which should reach full operations in the second half of next year.
But what complicates the Indonesian NPI outlook is Tsingshan's 1-million-tonne-per-year stainless mill in Indonesia. Although this started up in June, its ramp-up has sence been suspended.
Around half of the company's NPI output of 1.5-1.6 million tonnes per year (10-percent nickel contained) - including from the phase currently under construction - will be diverted to the Indonesian stainless mill, the company estimates. But it has yet to set a target on how fast it will ramp up production or reach full capacity.
Another complication out of Indonesia comes from recent speculation that the country could relax its export ore ban. Views are mixed - some believe an easing could happen as soon as in 2017 but others said a relaxation is unlikely. Doing so would defeat the purpose of the ban, which was to encourage downstream processing.
On the demand side, growth in Chinese stainless steel production is likely to continue next year. But there are uncertainties in the macroeconomic environment - including those brought about by rate decisions and presidential elections in the US, global central bank easing programmes and Brexit - that might affect global stainless demand.
Still, what seems certain is that the cons are outweighing the pros in nickel for now.
(Editing by Mark Shaw)