Will Nickel Continue to Outperform?

Nickel has been a standout performer in 2019 as rising worries over a possible supply curbs kept the prices afloat. Nickel prices surged over 48 per cent on LME (YTD) whereas prices on the MCX rose over 54 per cent. While the rest of the base metal struggled, reflecting rising uncertainties over the US-China trade spat, nickel enjoyed a solid bull run. The primary reason behind the robust rally was the ore export ban announced by Indonesia.

Indonesia is the world’s biggest exporter of Nickel ore followed by Philippines accounting for over 20 per cent of the total exports. Prices surged after Indonesia announced that it would impose the ban on exports of nickel ore effective from January 2020 which was earlier scheduled to come in to effect from 2022. The ban is planned for promoting the domestic stainless steel and electric vehicle battery industries. However, the rally seems to be losing steam after nations such as the Philippines and New Caledonia stepped up to increase their production capacity and cover the gap which would be witnessed once the ban kicks in.

In late October, nickel again found some support after Indonesia temporarily imposed restriction on export of the ore following a sudden increase in the number of shipments ahead of the upcoming ban in early 2020. The ban was imposed until the government investigated if exporters were in compliance with all the rules. After proper verification companies meeting all the rules related to exports were allowed to resume with their trading activities.

The export ban will undoubtedly hit the global supply chain as Indonesia accounts for about a quarter of the global mine supply (560,000 tonnes). Markets witnessed a similar situation in 2014 when Indonesia first announced a ban on the export of nickel ore as part of an initiative to build up its domestic refining industry. However, the ban was revoked in 2017 for a period of five years (until 2022) so that the domestic miners can build their smelters to process minerals such as nickel, bauxite and copper.

Philippines – the inadvertent winner
Philippines have been the unplanned winner in such scenarios as it is the next biggest exporter after Indonesia. Even the 2014 ban announced by Indonesia boosted Philippines exports of nickel ore to China as its acts as the alternate supplier. China (the biggest consumer of Nickel ore) imports the Nickel ore to produce nickel pig iron (NPI) which is used in the production of stainless steel and Electric Vehicle batteries. China’s stainless steel output will be impact as it is the world’s largest stainless steel producer and Nickel is a primary component of its production.

Now with the export ban kicking soon, the Philippines can lift their output again. However, the ore, which is supplied from the Philippines is of lower grade than the one exported by Indonesia. Lower grade ore affects the NPI producers to achieve the purity mix required for the production of stainless steel. Moreover, various environmental constraints in the Philippines have also impacted their output. So filling the gaps between supply and demand is not going to be a cake walk and it will have its impact on the prices until the effect of the ban settles down.

Moreover, reports stated that the Philippines could suspend five mining companies at the end of this year from the southern Philippines, Tawi-Tawi province which provides high grade of Nickel ore. Industrial data showed that maximum amount of the high-grade ore exported by the Philippines to China comes from Tawi-Tawi. The suspension of the mines in the southern nickel hub came during their ongoing review of mining policy.

Outlook
The fundamentals for nickel are quite strong with supply constraints rising from Indonesia and the Philippines, the major exporters of Nickel ore. Moreover, rising demand from the stainless steel and the Electric Vehicle segment have supported the prices.

Indonesia is currently operating with 11 operating processing plants with 25 smelting facilities in the pipeline aiming for a total ore processing capacity of 81 million tonnes per annum by 2022. It plans to become the Hub for electric vehicle batteries and stainless steel segment. It has been a very good year for Nickel; however, once the ban becomes effective in early 2020 we can see some major movements in prices. For now, the supply constraints will act in favor of Nickel prices which might move MCX Nickel higher towards Rs.1200/kg in a month time frame.

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