(Repeats without change. The opinions expressed here are those
of the author, a columnist for Reuters)
* LME metals index: https://tmsnrt.rs/2SbEYjO
* China's nickel imports: https://tmsnrt.rs/2SdbfqG
By Andy Home
LONDON, April 27 (Reuters) - If the boredom has well and
truly set in after weeks of travel restrictions and social
distancing, you could always join metal traders in a game of
lockdown lottery.
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) .LMEX 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 VALE3.SA 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 GLEN.L Raglan mine in Canada was closed but is
in the process of being restarted. Sumitomo Corp's 8053.T Ambatovy plant in Madagascar
remains out of action, while Australian producer Panoramic
Resources PAN.AX 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. ("Nickel prices rise on
supply disruptions", April 20, 2020).
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 NIKL.PS
and Global Ferronickel Holdings Inc FNI.PS - 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.
("China Commodities Trade Data", March 30, 2020).
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.
("Market Drivers: Nickel Price Rally", April 21, 2020).
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.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
LME Metals have absorbed the first-stage COVID-19 demand shock
IMAGE https://tmsnrt.rs/2SbEYjO
China's nickel import dependency IMAGE https://tmsnrt.rs/2SdbfqG
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Editing by David Goodman)