Nickel Slump Seen Ending as China Faces Ore Import Curbs

After slumping more than any other industrial metal, analysts and traders say the worst may be over for nickel as restrictions on shipments from Indonesia, the biggest producer, diminish a worldwide glut.

Indonesia banned some ore exports from May 6 and imposed a 20 percent tax on the remainder to spur the development of its refining industry. The nation’s output will drop for the first time in four years in 2013, slashing global supply growth to 0.2 percent, from 4.9 percent in 2012, Morgan Stanley estimates. Prices will average $20,000 a metric ton in the fourth quarter, an increase of 23 percent, the median of 16 analyst estimates compiled by Bloomberg shows.

The metal fell 13 percent this year on prospects for the biggest surplus since 2009. Morgan Stanley now predicts the glut will peak in 2012 and Barclays Plc says prices should rally toward the end of the year on strengthening demand from stainless-steel makers, the biggest consumers. The rebound may not happen until then as China runs down record ore stockpiles accumulated in anticipation of the Indonesian ban.

“The most bullish thing for nickel short-term is the impact of the ban on exports,” said David Wilson, an analyst at Citigroup Inc. in London and a former economist for OAO GMK Norilsk Nickel, the biggest producer of the metal. “We estimate China has enough stockpiles for about two-to-three months of consumption. There is a double-whammy impact there. There is less ore and it’s going to be more expensive.”

Industrial Metals

Nickel extended its drop this week and was 13 percent lower for the year at $16,305 on the London Metal Exchange by 1:43 p.m. Tokyo time. The LMEX index of six industrial metals was down 2.1 percent and the Standard & Poor’s GSCI gauge of 24 commodities fell 6.6 percent. The MSCI All-Country World Index of equities declined 0.5 percent and Treasuries returned 1.8 percent, a Bank of America Corp. index (MXWD) shows.

The glut will contract to 36,900 tons next year, equal to a week of demand, from 46,600 tons in 2012, Morgan Stanley said in a March report. Prices rallied 58 percent in 2009 as the surplus declined to 98,200 tons from 100,300 tons.

The bank’s analysts also expect record consumption every year until at least 2017. Output of stainless steel, accounting for 69 percent of nickel usage, will expand to an all-time high in 2012, according to MEPS (International) Ltd., a consultant to the industry.

Onca Puma

Indonesia banned exports of 21 unprocessed minerals, except for companies planning to build local refineries. Those shipments are subject to a 20 percent tax. National exports of nickel ore may drop as much as 20 percent in the second half, Sukristiyawan, the senior marketing manager of PT Aneka Tambang, the country’s second-largest producer, said in an interview this month.

That may be offset by additional supply from elsewhere in the world. Anglo American Plc (AAL)’s Barro Alto mine and Vale SA (VALE3)’s Onca Puma, both in Brazil, will add a combined 45,000 tons this year, Morgan Stanley estimates. Another 72,000 tons will come from projects in Australia, New Caledonia, Madagascar and the Philippines, according to the bank.

“Prices have to stay at these levels for a while longer to induce people to cut production,” said Jim Lennon, an analyst at Macquarie Group Ltd. in London, who has been following the market for three decades. “We’re just hearing of some cuts but not very much. There’s more stuff coming on.”

Stockpiles in warehouses monitored by the LME advanced 28 percent to 106,752 tons since early November, according to bourse data. They make keep rising as economic expansion slows.

China Growth

China grew 8.1 percent in the first quarter, the slowest pace in almost three years, and the 17-nation euro region stagnated, government data show. Nickel consumption contracted for three consecutive years before rebounding in 2010 as nations emerged from recession, Morgan Stanley said.

The predicted gain in prices to $20,000 would still be short of the record $51,800 reached in 2007. Norilsk Nickel will report net income of 133.7 billion rubles ($4.15 billion) this year, from 143.1 billion rubles in 2011, the mean of seven analyst estimates compiled by Bloomberg shows. While shares of the Moscow-based company fell 2.8 percent to $14.90 this year, they will rally to $20.60 in 12 months, according to the average of 10 forecasts.

New technology adopted by China’s makers of nickel pig iron, a substitute made from lower-grade ores, is driving down output costs, decreasing the likelihood of production cuts as prices slump. Average NPI overheads are now $16,500 a ton, from $17,300 last year, according to Barclays, which cites data from Brook Hunt, a research unit of Wood Mackenzie Ltd.

Stainless Steel

That trend may be reversed by Indonesia’s tax on ore exports, boosting average NPI costs to $17,400 by the end of the year, Nicholas Snowdon, a Barclays analyst in New York, wrote in a report May 29. Combined with strengthening Chinese stainless- steel demand in the second half of 2012, that would justify prices moving back toward $20,000, he said.

China’s imports of nickel ore from Indonesia climbed 15 percent to a record 3.34 million tons in April, according to customs data. Stockpiles at Chinese ports stand at almost 12 million tons, Barclays estimates.

They will be run down amid signs that demand for nickel is strengthening. Orders to withdraw metal from LME-monitored warehouses, or canceled warrants, averaged 5,819 tons this month, the most since October, bourse data show.

Global stainless-steel production will rise by almost 6 percent to 34 million tons this year, MEPS said in a report May 8. That compares with 3.3 percent in 2011, the Sheffield, England-based consultant said. Growth will be weighted toward the end of the year, with Macquarie forecasting a fourth-quarter gain of 13 percent, from a 0.1 percent contraction in the first three months of the year.

“Everyone who’s in their right mind should hate nickel fundamentally,” said Nikos Kavalis, an analyst at Royal Bank of Scotland Group Plc in London. “But it’s so cheap now. In the long-run these prices are not sustainable.”

To contact the reporters on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net; Jae Hur in Tokyo at jhur1@bloomberg.net; Ichiro Suzuki in Tokyo at isuzuki@bloomberg.net

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

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