Material Matters: Nickel, Met Coal & Iron Ore

Commodities | Sep 04 2019

A glance through the latest expert views and predictions about commodities. Indonesia's nickel export ban; metallurgical coal; and iron ore.

-Severe market tightness may not eventuate despite Indonesia's nickel ore export ban
-China may no longer be the marginal setter of seaborne coking coal prices
-Iron ore likely to remain in deficit over 2019

 

By Eva Brocklehurst

Nickel

Indonesia will bring forward its export ban for nickel ore two years, to January 1, 2020 from 2022. This reflects a desire to build out domestic nickel smelting capacity more rapidly. Nickel ore export quotas for 2019 are around 260,000t or 12% of nickel supply.

The prospect of this ban being brought forward has caused the nickel price to rally by more than 50% over the past two months, Citi observes. The broker has raised its bull-case price forecasts to US$17,500/t for 2020 and US$17,000/t for 2021, from US$14,000/t previously.

Prices need to remain high for some time to incentivise a supply response and Citi ascertains that current prices are enough to stop stocks becoming critically low in the medium term, although nickel ore and refined stocks will still draw down notably in the coming years.

UBS believes the ban could have a genuinely positive impact on the supply & demand dynamics for nickel over the next 1-2 years, supporting higher prices, but a squeeze is unlikely as there are a number of potential offsets. A buffer is likely to be provided by increased nickel supply from the Philippines and New Caledonia. Higher prices will also result in higher scrap recoveries as well as help offset nickel pig iron losses in China.

The Philippines lifted supply in 2015 after the last Indonesian ban, although UBS notes the exhaustion of some high-grade deposits and tighter environmental regulations may make this more difficult now. Chinese inventory at its ports stands at 115,000t of contained nickel and therefore a drawdown should allow Chinese nickel pig iron production to be sustained near current levels, the broker asserts.

While there are ample stocks to service projected deficits in refined nickel, project pay-back times have fallen sharply during the recent rally. Citi assesses nickel pig iron construction times are relatively short and the physical refined nickel market is not set to tighten until the second half of 2020.

Credit Suisse points out that when Indonesia banned exports for three years from 2014, tightness in the nickel market never eventuated, as the Chinese had large stockpiles and China stretched supplies in ways that remain unclear, although the Chinese economy slumped in 2015, reducing demand.

The broker suggests the world is probably better prepared for the export ban now, as there is so much more nickel pig iron production in Indonesia. The three largest producers, Tsingshan, Delong and Jinchuan together added 160,000t of nickel pig iron capacity in 2019.

While much of this is intended for coincident stainless steel plants, Credit Suisse also notes that this has proved problematic as many countries, including China, have blocked stainless imports. Hence, nickel pig iron exports may be the only option.

Credit Suisse believes in 2020 there could be a supply gap, as the market was not prepared for the ban to be brought forward to this extent. However, the global economy is in trouble and this may assist in reducing demand, as will the glut of stainless steel built up by China's producers.

On the demand side risks are skewed to the downside, Citi suggests, and the amount of supply required to fill the gap from Indonesian bans depends on the level of demand. The broker expects nickel demand to grow 4% in 2020 but, in terms of a mild recession scenario, nickel will be in surplus in 2020 and prices will average US$14,000/t.

UBS points out Indonesia has a track record of reversing export restrictions so it is possible any ban will be partial and could be reversed. The broker questions whether all of the Indonesian smelters due to be financed in 2020/21 can get off the ground without the revenue from ore exports.

Metallurgical Coal

Morgan Stanley observes factors, other than the usual seasonality, have come into focus for metallurgical (coking) coal. A well-supplied market and weakness in steel production outside of China have driven a price correction in hard coking coal. There has also been muted demand from India during the monsoon while China has restricted imports by delaying customs clearance.

The broker suggests market fundamentals have changed and there is an emerging disparity between China's domestic prices and the seaborne price. China is a swing buyer of metallurgical coal but appears no longer to be the marginal setter of the seaborne price.

This is explained by the likelihood that China's import restrictions have pushed the seaborne market into surplus. Still, there is been a robust flow of seaborne material as imports in the first half of the year were up 19%.

Hence, Morgan Stanley suggests Chinese buyers may simply be unwilling to pay the same price for seaborne imports as for domestic coal. Beyond 2019, the broker believes China will maintain support for its domestic industry, possibly through import controls, and its metallurgical coal imports are likely to gradually decline, which means that seaborne production costs remain relevant.

The spot price has dropped back to levels close to the marginal cost of US$146/t F.O.B. Australia. An extended period of low prices will eventually drive marginal production, mainly from the US hand Mozambique, out of the market, the broker concludes.

Iron Ore

UBS suspects the iron ore price is oversold and, despite some positive signals, the market remains in deficit. There has been unprecedented volatility for iron ore over 2019 and the market is now looking at the stabilising of Chinese stocks at the ports.

Export data shows trade flows from the major producers have recovered, as the focus is now returning to restored output at the Brucutu mine in Brazil. Still, the major producers have not regained control of the market and UBS expects iron ore to remain in deficit in 2019, unless steel output slows dramatically.

UBS notes record Chinese steel output in the first half of 2019 kept prices at elevated levels but this could be topping out. Official output slowed in July and steel inventory at traders has lifted, while rebar and hot rolled coil prices have slipped. Sentiment has also been dampened by the trade conflict between China and the US. The broker expects any prospective Chinese stimulus will favour the bulk commodities over base metals.

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