(Repeats with no changes. The opinions expressed are those of
the author, a columnist for Reuters)
* China's nickel imports 2013-2019: https://tmsnrt.rs/2PExx5V
By Andy Home
LONDON, Sept 3 (Reuters) - Whatever happened to that old
market adage of buying the rumour and selling the fact?
Nickel investors bought heavily into rumours that the
Indonesian government was thinking about bringing forward a ban
on nickel ore exports. Now the ban has been confirmed for the start of next year
rather than the original 2022 deadline, they have bought some
more.
London Metal Exchange (LME) three-month nickel CMNI3 hit a
five-year high of $18,850 per tonne on Monday with the Shanghai
Futures Exchange scaling life-of-contract highs amid surging
open interest.
Goldman Sachs added fuel to the bull fires with a forecast
that the nickel price could spike to $20,000 over three months.
An Indonesian export ban could impact up to 10% of global
supply, according to the bank.
That analysis comes with multiple moving parts, not least
Indonesia's own recent history of policy U-turns on the question
of its nickel exports.
While some sort of supply disruption is guaranteed, there is
a lot of speculative heat in the sizzling nickel market right
now, meaning more price volatility is also guaranteed.
INDONESIA BANS ORE EXPORTS, AGAIN
The nickel market has been here before.
Indonesia banned all exports of nickel ore at the start of
2014 before allowing a partial resumption by operators who could
prove they were working on building processing capacity.
The compromise was due to run until 2022 but the country's
government has accelerated the timetable with a full ban now due
at the start of 2020.
Given the policy chop-and-change since 2014, it's by no
means certain that things won't change again, particularly if
the loss of export earnings starts impacting some of the
processing projects already underway.
But assuming the ban holds, there will be an undoubted
short-term hit on supply, given Indonesia accounts for around a
quarter of global mine supply.
The question is to what extent and how quickly supply chains
can adapt to compensate for the loss of Indonesian ore exports.
ALTERNATIVE SUPPLIES
The big winner from the original Indonesian ban was the
Philippines, which boosted its exports of nickel ore to China.
It remains a key alternative supplier to China's nickel pig
iron (NPI) sector and in volume terms shipments now run at
almost double the rate of Indonesian flows.
There is some potential for the Philippines to lift output
again, although the country's nickel miners have been
constrained by tightening environmental rules on their
operations.
The problem, though, is that ore from the Philippines tends
to be lower grade than that from Indonesia, which affects NPI
producers' ability to achieve the purity mix needed for
stainless steel production.
More significant as an alternative supplier is Indonesia
itself. The logic underpinning Indonesia's ore policy is the
development of a domestic processing industry.
It has already been successful, most notably with China
Tsingshan Group's ramp up of both NPI and stainless steel
capacity in the country.
Others have moved only as far as first-stage processing,
turning ore into NPI for onward shipment to China.
Such exports have grown to become a significant source of
supply for China's stainless steel producers, albeit one that is
sometimes difficult to quantify given China's customs department
classifies Indonesian NPI as "ferro-nickel".
The give-away clue is the lower value of Indonesian
"ferro-nickel" imports relative to other suppliers. The average
implied value of imported Indonesian material was $1,740 per
tonne in July compared with in excess of $4,000 for producers
such as Brazil or Colombia.
Total "ferro-nickel" imports from Indonesia were just 7,200
tonnes in 2014, the year when the ore ban was first introduced.
They have been running at an annualised 1.2 million tonnes
over the last three months.
Evidently, there is plenty of potential for these exports to
rise if Indonesian miners accelerate the building of processing
capacity as is clearly the aim of the new, fast-track ban.
Indonesia currently has 11 operating processing plants with
25 more in the pipeline, according to the Ministry of Energy and
Mineral Resources.
Indeed, energy and minerals consultants Wood Mackenzie
forecast that by 2021, Indonesian NPI output will surpass
China's, which is estimated at 570,000 tonnes this year.
OVERHEATING?
Even allowing for more Philippines exports and greater
volumes of Indonesian NPI, the supply chain is going to be
sorely tested once the ban kicks in next year.
Analysts are revisiting their forecasts with most now
penciling in a global supply deficit both next year and in 2021.
This is the core story underpinning nickel's stellar rally
but it's worth remembering that nickel has been trading the
Indonesian rumours for several months now.
News of the ban, if it can be called news at all, should in
theory be almost totally priced in at current levels.
But markets are rarely so rational when gripped by the sort
of speculative fever currently animating nickel.
Shanghai nickel has seen an unprecedented build in open
interest on the latest leg of the rally, suggesting a mass
stampede by speculators into an already hot market.
LME broker Marex Spectron estimates the speculative long in
London at around 22% of open interest, not yet at levels seen in
June 2018, when it reached 34% of open interest, but still
substantial.
Extra spice to an already heady bull cocktail comes in the
form of a tightening in the LME spread structure.
The benchmark cash-to-three-months time spread CMNI0-3 was
trading in comfortable $90-per tonne contango as recently as the
start of July. As of Friday's close it was valued at a
backwardation of $104 per tonne.
The spread has eased somewhat over the last 24 hours but
cash metal is still at a significant level to forward prices,
acting as a deterrent to would-be short sellers.
Nickel, in other words, finds itself in a perfect bull
storm, which is why it has deviated so sharply from the rest of
the LME base metals suite.
But can it simply keep on rallying now that there is no more
Indonesian "news" to trade?
Even Goldman's analysts caution they are expecting the price
to retrace to $16,000 over a 12-month time-frame as supply
adapts to the Indonesian ban.
Whatever happens, it's not going to be a smooth ride. It
never is when it comes to nickel.
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Indonesian Ore Ban Redux https://tmsnrt.rs/2PExx5V
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(Editing by Emelia Sithole-Matarise)