By Millicent Dent
New York 03/01/2017 - The global nickel market is tightening, but any price rally this year will be capped by a large inventory overhang and slower Chinese demand growth, according to Capital Economics Ltd.
Nickel prices are expected to hit $12,000 per tonne ($5.44 per pound) by the fourth quarter of 2017, a gain of about 20 percent from current prices, analysts at London-based Capital Economics said in a Jan. 3 report.
The London Metal Exchange’s three-month nickel contract closed at $10,270 per tonne ($4.66 per pound) Jan. 3, down 6.8 percent from $11,025 per tonne ($5 per pound) on Dec. 20.
“We had cautioned that much of the revival in prices in mid-2016 was driven by optimism about demand, which in turn fueled speculative buying. As such, the price of nickel was looking at risk of a correction, which appeared to be underway at the end of last year,” the analysts said.
On the demand side, global refined nickel consumption increased by 6.2 percent in 2016, driven by a pick-up in stainless steel output and restocking by consumers. However, demand growth is expected to slow in 2017 for three reasons:
- China’s stainless steel production might have run ahead of demand last year.
- The restocking process of nickel appears to be largely finished, particularly if stainless steel production growth wanes.
- Chinese economic activity is expected to dwindle this year as the effect of the earlier stimulus dims and efforts to curb credit growth begin to bite.
The European Union might also have muted growth in demand because political uncertainty could impact economic activity, analysts say.
Demand in the U.S. could ramp up if President-elect Donald Trump manages to loosen fiscal policy. However, the impact would be minimal because the United States only makes up around 7 percent of the global market.
On the supply side, a 2016 government crackdown on Filipino nickel mines over environmental and safety standards resulted in at least 11 mines being closed and another 20 being placed under threat, hampering the nickel supply. The resumption of refined nickel exports from Indonesia could help make up for the dearth of exports from the Philippines.
The China-based Tsingshan Holding Group Co. Ltd.’s rotary kiln and submerged arc furnace (RKEF) plant currently has a capacity of 90,000 tonnes per year and hopes to raise capacity in 2017 to 150,000 tonnes per year. In addition, a couple of other RKEF plants could become operational in the first half of this year in Indonesia, though there are rumored to be issues at the plants.
There’s also the likelihood of other supply sources entering the market. In late December, the New Caledonia government approved requests from nickel miners to export more than 2 million additional tonnes of ore to China. And Moscow-based MMC Norilsk Nickel plans to ramp up output, though that is unlikely to occur this year.
Chinese producers of nickel pig iron are another potential source of supply, though it’s unclear what output would look like in 2017.
While output fell in 2015 and 2016, it seemed to pick up at the end of 2016 due to strong demand from the stainless steel sector. But the revival may not be sustainable, since ore stocks at China’s ports are approaching five-year lows, the analysts said.
Despite the likelihood of slower growth in demand, the analysts expect the market to record a deficit of around 75,000 tonnes in 2017, which will put a floor under prices. In addition, somewhat stronger global economic growth should also contribute to higher prices.
But the upside is also fairly limited, because global inventory stands at nearly 12 weeks of consumption, which is more than enough to cover the modest shortfall.
“LME exchange stocks fell in 2016 but remained elevated in absolute terms. What’s more, it is likely that there are sizable unreported stocks,” the Capital Economics report said.