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One producer expects this effect to drive average NPI costs higher as much as 25% by 2015 back to $20,000/t. The wildcard in this projection is how Indonesian government policy towards ore exports evolves.

11 Nov 2012

JAKARTA (Commodity Online): Nickel has been the weakest performing base metal on the LME so far in 2012, falling nearly 15% year-to-date compared with an average 3% rise across the rest of the complex.

While it is difficult to rationalise this performance relative to similarly oversupplied metals, such as aluminium and zinc, we would not dispute that nickel’s performance has been fundamentally justified, Barclays added.

Faced with a near 60Kt market surplus, prices have traded into the cost curve with a view to rationing output from the highest cost producers, namely the Chinese nickel pig iron sector.

Given the softness in the Chinese stainless steel sector (which consumes NPI units), operating at between 50 and 60% of capacity in recent months, nickel prices have subsequently traded to that equivalent level in the NPI sector cost curve.

According to Barclays, over the past four years we have seen a significant shift in predominant technology used by the sector, from energy intensive blast furnaces towards more efficient electric arc furnaces and most recently, a move towards rotary kiln electric (RKEF) furnaces.

While costs are flexible, not least depending on nickel ore and electricity prices, the net effect of this shift has been to lower production costs. From $20,000/t in 2010, average NPI production costs have fallen to near $16,000/t. In that respect LME nickel prices have traded exactly as one would have expect, settling close to that level in mid-2012 until signs of improved stainless activity and higher demand for NPI units in China start to develop. So where does the market head from here?

The British bank continued that, given our expectation of market surpluses in both 2013 and 2014, the cost curve and hence the NPI sector (and interaction with the Chinese stainless sector) will continue to dominate price dynamics. One common observation from producers at LME week was the predominant trend of higher grade ore depletion, which is anticipated to accelerate in the middle of this decade.

This is important for NPI costs given that RKEF producers utilise high grade ore (largely sourced from Indonesia), and higher ore prices should push costs also. One producer expects this effect to drive average NPI costs higher as much as 25% by 2015 back to $20,000/t. The wildcard in this projection is how Indonesian government policy towards ore exports evolves.

The prospective 2014 ore export ban is bullish because it will essentially fastforward the squeeze of high grade ore supply. However, last week the country’s Supreme Court apparently overturned some of the regulations introduced earlier this year regarding export duties, license and quotas. This adds yet more uncertainty to the outlook for Indonesian exports which in turn will be vital as to whether this dynamic gains traction with LME prices over the next 12 months or is deferred until mid-decade, Barclays concluded.


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