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Message: Resilient nickel rallies through macro noise

Looming Indonesia ban and strong Chinese demand help metal hit 11-month high

Neil Hume

“The macro is trumping the micro” has been a near-constant refrain in metal markets this year as concerns about the impact of the US-China trade spat on global growth have outweighed robust supply and demand fundamentals. However, one industrial metal is managing to buck the trend — nickel.

The price of the metal, which is used to make stainless steel, has been on a tear since Indonesia pledged last week to stick with plans to stop exports of unprocessed nickel ore in 2022. The ban is aimed at encouraging the domestic development of value-added industries such as stainless steel production.

Since last week nickel has jumped 9 per cent to an 11-month high above $14,000 a tonne, extending gains since the start of the year to 30 per cent. In contrast, copper is up just 1.2 per cent in 2019, while aluminium has gained only 2.5 per cent.

Indonesia is the world’s second-largest exporter of nickel ore after the Philippines and a key supplier to China’s steel industry. If Jakarta goes ahead and bans overseas sales of unprocessed ore it would severely limit China’s output of nickel pig iron (NPI) — a cheaper form of the metal.

“[Were] a full ban to be imposed, this would severely limit China’s NPI output, which currently accounts for 20 per cent of global nickel production,” BMO Capital Markets said in a recent report.

Analysts believe the chances of an export ban from Jakarta are high because of the rapid growth of its domestic stainless steel industry, as showcased by a huge integrated operation on the island of Sulawesi. But Indonesia, south-east Asia’s largest economy, is just one factor driving the nickel price higher.

Demand for the metal has outstripped supply for several years, helping to reduce stockpiles that have fallen from around 500,000 tonnes in mid-2016 to fewer than 200,000 tonnes today.

Recommended Tail Risk Neil Hume Copper price is being held hostage by macro jitters Production of “300 series” stainless steel, which has a high nickel content, has been strong in the first half of the year in China, say traders, although inventories have also been climbing, raising questions about the real strength of underlying demand.

Nonetheless, this has helped offset weakness in other markets and led to genuine tightness for some products. Another tailwind for nickel is the switch to cleaner energy, as the metal is a key component in the battery packs that power electric vehicles.

While that bullish narrative could unravel if a group of Chinese companies succeeds in making battery-grade metal more cheaply, it remains a long shot, say industry consultants. Of course, after such a strong run it is probable that nickel — a notoriously volatile metal — will pull back as the northern hemisphere heads into a summer lull. However, if Chinese demand remains and Indonesia does not backtrack on its export ban, the risk/reward in nickel looks favourable.

Source: https://www.ft.com/content/b0b3b4f2-a7c5-11e9-b6ee-3cdf3174eb89

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