(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, July 17 (Reuters) - Nickel is enlivening an
otherwise torpid summer for the base metals complex.
The market is on a bull charge in both London and Shanghai.
London Metal Exchange three-month nickel CMNI3 has jumped
23% since the start of June and at a current $14,250 per tonne
is trading at its highest level in a year.
Chinese speculators are surging into the Shanghai Futures
Exchange contract, which is also nudging one-year highs.
The trigger for this collective exuberance is news that
Indonesia will stop allowing the export of unprocessed nickel
ore in 2022.
Since this is a key raw material pipeline for China's giant
nickel pig iron (NPI) sector, the price reaction might seem
rational.
Except that the "news" is not new. The 2022 deadline was set
in 2017, when the Indonesian government allowed a five-year
grace period for ore exporters in return for investment in
processing capacity.
How much nickel ore the country will be exporting come 2022
is also a highly moot point.
But such niceties have done nothing to damp speculative
buying interest, proof perhaps that Goldman Sachs was right when
it described nickel as behaving like a biotech stock.
BRIEF HISTORY OF THE BAN
Indonesia introduced a ban on the export of unprocessed
minerals in January 2014 with the explicit aim of forcing miners
to build domestic processing capacity.
The nickel market was caught unawares, even though the law
had been pending for five years. The price surged to a mid-2014
peak of $21,625.
Indonesia's exports of nickel ore ground to a halt over the
course of 2014-2016, although the expected hit on China's NPI
sector never materialised because of the rise of the Philippines
as an alternative supplier.
January 2017 was supposed to see the ban reaffirmed and
exemptions such as that for copper concentrate ended.
However, the Indonesian government did an about-turn,
perhaps accepting that getting smelters built in such a short
period of time was unrealistic.
It pushed back the deadline to 2022 and introduced a system
of annual export permits for those operators who could prove
they were building processing plants.
Progress is regularly reviewed. Four miners, three nickel
and one bauxite, had their export licences suspended in August
2018. Two, both nickel, were subsequently reinstated after
demonstrating they had met the conditions.
Nickel ore exports to China kicked back in over the course
of 2017 and have picked up momentum ever since. However, they
have not displaced Philippine material. China imported 1.7
million tonnes of nickel ore from Indonesia in May. Imports from
the Philippines were higher at 3.3 million tonnes.
China's nickel ore buyers have successfully diversified
their sourcing to reduce their reliance on Indonesia, cushioning
them against another complete export ban.
PROCESSING BUILD-OUT
It's also highly uncertain how much nickel ore Indonesia
will be exporting in 2022 anyway.
The comments that triggered the recent market excitement
were made by Indonesian Energy and Minerals Resources minister,
Bambang Gatot Ariyono, in a July 8 parliamentary hearing.
He reaffirmed the 2022 cut-off point for all unprocessed
mineral exports but with the important caveat that the ministry
forecasts there will be 41 smelters, including 22 nickel
smelters, operating in the country by that stage.
That may be on the optimistic side but Indonesia's policy of
pushing miners towards downstream processing is undoubtedly
working.
China's Tsingshan Group has gone all the way down the
processing chain, offshoring some of its mainland stainless
steel capacity with a three million tonne-per-year plant in
Indonesia fed by local nickel ore.
It and others are now looking at building capacity to
produce battery-grade nickel to meet rising demand from electric
vehicles (EV). Some operators are just converting ore to nickel pig iron
and shipping the intermediate product to China.
All this evolving processing capacity will naturally reduce
the amount of ore available for export by the time the ban comes
into full force in 2022.
Assuming, of course, the Indonesian government doesn't
change its mind again at that stage.
HOPEFUL EXUBERANCE
None of which matters in a market where speculative momentum
has taken over.
The move higher may have started in London but it's the
Shanghai market that has been setting the more recent pace.
The Shanghai futures market is experiencing one of those
speculative surges that characterise commodity trading on
Chinese exchanges.
Market open interest has mushroomed by 47% in the space of
two weeks as the price has risen. Volumes are running at their
highest levels in a year.
All of which should ring alarm bells about what happens if
the upward momentum stalls.
So should talk in London of producers selling forwards at
these price levels and a pick-up in interest for downside put
options.
There is more than a whiff of irrational exuberance to
nickel's stellar performance over the last couple of weeks.
But the current market dynamics merely reinforce nickel's
"hope stock" status conferred by analysts at Goldman Sachs,
A "hope stock", such as a small biotech or software
start-up, trades above any rational projection of its current
operating metrics basis the "hope" that it will outperform at a
future date.
So nickel, while currently linked to the fortunes of the
stainless steel sector, is simultaneously pricing in a premium
for its future usage in the EV revolution.
Against a backdrop of broader investor interest in anything
and everything metallic that goes into a lithium-ion battery,
nickel is now firmly on the speculative radar.
That much is clear from the Shanghai crowd-surge but
speculative buying, both in the paper and physical markets, has
become an ever more noticeable feature of the London market over
the last couple of years.
It means nickel is constantly primed for the sort of
mini-burst higher currently underway.
It doesn't matter that an Indonesian nickel ore export ban
is still three years away. Or that it will take even longer for
the EV demand pull to outweigh that of stainless steel.
Nickel has got the speculative bug.
Looks like it's going to be a bumpy ride until further
notice.
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Nickel's Indonesian export ban fears unfounded https://tmsnrt.rs/2O8L0Cu
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(Editing by Jane Merriman)