Lockdowns and low prices generate nickel supply shock

Metals have priced in the demand shock, or at least the first-stage demand shock, rippling around the world with the spread of covid-19.

The index of the major base metals traded on the London Metal Exchange (LME) bottomed out on March 23 and has since rebounded by 7%.

Now the game is to assess the size of the supply shock to follow as national lockdowns force mines to curtail operations while low prices push some higher-cost operators out of the market altogether.

Nickel is a particularly complex version of the game.

This was always going to be a year of shifting supply dynamics after Indonesia brought forward a ban on nickel ore exports, cutting off a key raw material flow for China’s stainless steel sector.

The supply landscape is now changing ever faster as the coronavirus and bombed-out pricing combine to generate a significant series of production hits.

Supply casualties

Nickel has tracked the broader LME price trajectory, recovering from a four-year low of $10,865 a tonne in March to a current $12,820.

It has been buoyed by a lengthening list producers hit hard by the covid-19 pandemic.

Brazil’s Vale has cut its 2020 guidance by up to 20,000 tonnes, citing “limited ability to keep current maintenance shutdown schedules” with reduced workforces and disruption to parts and inputs.

Glencore’s Raglan mine in Canada was closed but is in the process of being restarted.

Sumitomo Corp’s Ambatovy plant in Madagascar remains out of action.

Australian producer Panoramic Resources has suspended its Savannah mine until further notice because of the cost of operational disruptions.

Under the radar, however, low prices are also hitting multiple ferronickel producers, most of them privately or government owned and therefore not obliged to make public statements.

Ferronickel has traded at a steep discount to an already very low LME nickel price, forcing production cuts in the Dominican Republic, Greece, North Macedonia, Kosovo-Serbia and New Caledonia, Macquarie Bank says.

Macquarie’s nickel analyst Jim Lennon estimates such market-related cuts total about 80,000 tonnes, compared with virus-related losses of 91,000 tonnes.

The combined impact represents about 6% of last year’s global supply.

Macquarie has trimmed its expected 2020 supply surplus to 60,000 tonnes despite factoring in a steeper anticipated decline in demand.

Obviously any attempt to pinpoint a market balance in such a fast-changing world comes with major caveats.

“Forecasting is a weekly exercise these days, with lots of twists and turns likely,” the bank notes.

Twists and turns

Twisting and turning most is the nickel ore segment of the supply chain.

China’s ore imports slid 5% over January and February relative to last year.

That was to be expected given Indonesia’s ban on exports from January, though some late shipments may have spilled into the new calendar year.

All eyes were on the Philippines to lift ore output in partial compensation, but that country has placed lockdown restrictions on the nickel-mining region of Surigao de Norte, causing the country’s top producers – Nickel Asia Corp and Global Ferronickel Holdings Inc – to suspend operations this month.

Philippine ore shipments to China drop off sharply at this time of year because of the country’s rainy season, but they usually recover in March and April.

This year’s timetable is starting to look very different.

Meanwhile, ore stocks at Chinese ports are low and falling while nickel pig iron producers (NPI) are cutting production.

Macquarie has reduced its NPI production forecast for this year from 470,000 tonnes to 430,000 tonnes.

It estimates China’s output last year was 585,000 tonnes.

Can the gap in supply to China’s manufacturers of stainless steel be offset by higher NPI production from Indonesia, where nickel production has so far been relatively unscathed by either lockdown or price?

China’s imports of Indonesian NPI more than doubled to 404,000 tonnes in January and February, according to Citi.

The relocation of global NPI production from China to Indonesia is an accelerating trend, adding to the complexity of nickel supply calculations.

There are many possible permutations to the nickel ore and pig iron puzzle.

These depend on when the Philippines resumes nickel mining, the speed of Indonesian production growth and the resilience of China’s ore supply chain.

But the hit to Chinese NPI producers is becoming increasingly apparent, with March output dropping 16% year on year to 41,900 tonnes, according to Argonaut Securities.

Narrowing the gap

It’s far from certain that even this scale of supply disruption is sufficient to offset the viral hit to nickel demand.

In the most recent Reuters poll of analysts, the median nickel market balance forecast for this year was a surplus of 89,000 tonnes – a sharp shift in opinion from the January poll, when analysts were expecting a supply deficit.

Russian producer Norilsk Nickel last week came out with an even heftier surplus estimate of 149,000 tonnes.

All such forecasts are a moving target.

Calculating global demand right now is an even more hazardous exercise than keeping tabs on nickel’s supply disruptions.

But the growing supply response, involuntary though it might be, will mitigate the demand shock by reducing the potential for exponential stocks build.

LME stocks surged over January and February but that was largely down to the reappearance of all the metal that was shifted to off-market storage last year.

Since then, LME inventory has largely plateaued around 230,000 tonnes.

More tellingly perhaps, there was a conspicuous absence of stocks build in Shanghai Futures Exchange (ShFE) warehouses over the Lunar new year holidays and the quarantine period that followed.

Since the start of January, ShFE inventory has fallen by 9,946 tonnes to 27,461 tonnes, the lowest level since October last year.

China is starting to look short of nickel, in terms of both metal and ore, with its ability to replenish supplies facing increasing challenges from nickel’s growing supply disruptions.

(Editing by David Goodman)