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Nickel Glut Recedes as Biggest Metals Loser Rallies: Commodities

November 26, 2012

Nickel Glut Recedes as Biggest Metals Loser Rallies

A truck carries nickel ore out of Western Areas NL's Tim King Pit open-cut nickel mine at Spotted Quoll, in Forrestania, Western Australia. Photographer: Ron D'Raine/Bloomberg

Nickel, this year’s worst-performing metal, is rallying as analysts from Standard Bank Plc to BNP Paribas SA forecast a smaller-than-expected supply glut in 2013.

Standard Bank reduced its estimate for the surplus by 17 percent on Oct. 15, citing project delays, and BNP Paribas said Nov. 12 it now expects output to match demand, after cutting its projection three times since April. Credit Suisse Group AG and Citigroup Inc. also lowered forecasts in the past two months. Nickel will average $19,000 a metric ton in the second quarter, 15 percent more than now, the median of 11 analyst estimates compiled by Bloomberg shows.

Futures fell 68 percent since reaching a record $51,800 in 2007 as higher prices spurred companies from Anglo American Plc to Vale SA to invest in new mines or expand existing ones. The surplus started in 2011 as slower growth weakened demand for stainless steel, which accounts for 65 percent of nickel consumption, and new supply emerged. Analysts are now paring supply forecasts as projects fall behind schedule. Prices rallied 4.4 percent in the past month.

“The market balance is tighter than people had initially thought,” said Leon Westgate, an analyst at Standard Bank in London. “There are a number of operations and significant amount of capacity that may run into various issues. In terms of that producer wall of nickel, it may not be quite as large or impregnable as it looks on paper.”

Metal Production

Nickel retreated 12 percent to $16,455 on the London Metal Exchange this year as the bourse’s LMEX gauge of six industrial metals gained 1.3 percent. The Standard & Poor’s GSCI index of 24 commodities rose 0.3 percent and the MSCI All-Country World Index (MXWD) of equities advanced 9.8 percent since the beginning of January. Treasuries returned 2.3 percent, a Bank of America Corp. measure shows.

Refined-metal production will expand 4.9 percent to 1.75 million tons next year, as demand increases 6 percent to 1.72 million tons, Standard Bank estimates. Its projected surplus of 35,000 tons is 27 percent lower than this year and the forecast 5.8 percent advance in mine output in 2013 would be the smallest gain since 2009. Credit Suisse expects a glut of 31,000 tons and Citigroup a 22,300-ton supply shortfall.

More than 800,000 tons of planned or existing production capacity is under threat of disruption in the next 12 to 18 months, according to Standard Bank. Macquarie Group Ltd. anticipates that as much as 93,500 tons of production may be disrupted next year, compared with 9,000 tons in 2012.

Two Quarters

Stainless-steel output will expand 3 percent to a record 35 million tons in 2013, according to Sheffield, England-based MEPS (International) Ltd., an industry consultant founded three decades ago. China’s economy, the biggest producer of the alloy, will accelerate in this and at least the next two quarters, the mean of 37 economist estimates compiled by Bloomberg show. The nation accounts for 40 percent of nickel demand, according to Morgan Stanley.

China is also one of the greatest threats to the projected rally because of its production of nickel pig iron, a substitute made from lower-grade ores. Output probably will be at least 300,000 tons this year and 330,000 tons in 2013, Macquarie forecasts. Capacity may increase 500,000 tons in the next several years, Deutsche Bank AG estimates.

The industry is spending as much as $7 billion on new technology that lowers costs, Macquarie says. That decreases the likelihood of smelters closing should prices slump. Estimated overheads are now $15,000 to $16,000 a ton, compared with $18,000 to $20,000 two years ago, according to Deutsche Bank.

Pig Iron

“It’s hard to get excited about nickel,” said Jim Lennon, an analyst at Macquarie in London. “There is very little reason to think the price can rally from where we are today, especially given the likely surge in nickel-pig-iron production over the next three to six months.”

NPI output may be curtailed by curbs to nickel-ore exports from Indonesia, where the government is trying to spur the development of the domestic refining industry. Indonesia’s ore yields at least 18 kilograms (40 pounds) of metal from every ton of rock, compared with about 11 kilograms from Filipino supply, Macquarie says. Without the higher grades, production costs will rise “significantly,” Barclays Plc wrote in a report Nov. 8.

The International Monetary Fund cut its projection for growth in 2013 twice since July, to 3.6 percent. The 17-nation euro-area’s economy tumbled back into recession last quarter for the second time in four years. Nickel demand contracted in the three years through 2009 as record prices curbed consumption and economies endured the global recession, Morgan Stanley estimates. Stockpiles in LME-monitored warehouses rose 50 percent this year, bourse data show.

Western Australia

About 25 percent of the nickel industry is operating at a loss at current prices, according to Wood Mackenzie Ltd., an Edinburgh-based researcher. Vale (VALE:US), the second-biggest producer, said Oct. 19 it would suspend operations at its Frood nickel and copper mine in Canada and Xstrata Plc, the fourth-largest, said Sept. 26 it will shut the Cosmos mine in Western Australia.

Vale, based in Rio de Janeiro, said in July it would miss its 2012 nickel output targets after accidents halted nickel projects in New Caledonia and Brazil. Output at London-based Anglo American’s Barro Alto project in Brazil will be impacted after a kiln wall collapsed in October, and production at its Loma de Niquel mine in Venezuela was stopped in September.

Shares of OAO GMK Norilsk Nickel, the biggest producer, fell 19 percent to 4,649 rubles ($149.80) since the start of March. The stock of the Moscow-based company will reach 5,770 rubles in 12 months, the average of 10 analyst estimates compiled by Bloomberg shows. Net income will increase 7.9 percent to $3.24 billion in 2013, according to the mean of five estimates.

Production Costs

Global mine supply may start contracting in 2017 because slumping prices and rising production costs are spurring companies to invest in other commodities, Citigroup says.

“The history of the nickel industry is that it will shoot itself in a foot at every opportunity with a new process,” said Andrew Mitchell, an analyst at Wood Mackenzie in Guildford, England. “History says that they do not perform in general as well as anticipated, certainly by the owners of the projects.”

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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