Nickel, the worst-performing industrial metal in the past year, is bottoming as prices fall below the costs of producing cheaper substitutes, curbing supply as consumption rebounds.
Prices have fallen 12 percent in the past year and are now below the cost for China to produce nickel pig iron, or NPI, a substitute derived from lower-grade ores, at an average $15,700 a metric ton, Barclays Plc says. Nickel, which traded at $15,446, will go as low as $14,500 this year, the median of 12 analyst estimates compiled by Bloomberg shows.
The metal retreated in four of the past six years as China responded to shortages by adding NPI output that now accounts for 18 percent of world supply, from 3 percent in 2006. Slumping prices may slow the expansion just as demand accelerates at the fastest pace in three years and orders to withdraw record stocks from warehouses reach more than six times the average over the past decade. Nickel will trade at $18,100 in the fourth quarter, or 17 percent more than now, the median of 25 estimates shows.
“You have less efficient producers in China, so they are more prone to cut back on production if they see prices fall much,” said Alexandra Knight at National Australia Bank Ltd. in Melbourne, the best forecaster for industrial metals tracked by Bloomberg over the eight quarters. “We are still forecasting growth of 8 percent for China in 2013. That should be supportive of the base metals market over the year ahead.”
Nickel fell 9.5 percent this year on the London Metal Exchange as the LMEX index of six metals dropped 10 percent. The decline compares with a 6.2 percent retreat in the Standard & Poor’s GSCI index of 24 commodities and a 4.6 percent gain in the MSCI All-Country World Index of equities. The U.S. Dollar Index, a gauge against six major trading partners, rose 3.4 percent and Treasuries returned 0.6 percent, a Bank of America Corp. index shows.
Global output will exceed demand for a third year as China makes the most ever nickel pig iron, or NPI, a substitute for the purer metal traded in futures, Morgan Stanley estimates. Production will outpace demand by 88,000 tons this year, or more than seven months of U.S. consumption, Barclays estimates. While that’s unchanged from last year, the projected surplus is almost nine times more than the bank was forecasting as recently as October. New projects from Sherritt International Corp. in Madagascar to Vale SA in New Caledonia are also adding supply as Chinese NPI output expands for at least the eighth consecutive year, Morgan Stanley says.
Both are the consequence of prices that reached a record $51,800 in 2007, spurring new investments. Mining companies had failed to keep pace with the 10-fold expansion in China’s stainless-steel output from 2000 to 2006, Barclays says. The alloy accounts for about 65 percent of global nickel demand, according to the International Nickel Study Group in Lisbon. China now consumes 40 percent of the base metal, more than double the proportion seven years ago.
Annual gluts since 2011 caused inventories tracked by the LME to double since November 2011 to a record 169,386 tons, exchange data show. Morgan Stanley expects demand to expand 10 percent in 2013, the most since 2010. Global stainless steel output will rise 4.9 percent to a record 36.3 million tons this year, according to MEPS (International) Ltd., an industry consultant in Sheffield, England.
Orders to withdraw metal from warehouses, known as canceled warrants, doubled to 24,528 tons this year, compared with an average of 3,721 tons over the past decade, according to LME data. Consumption, valued at $28.4 billion last year, is expanding as the International Monetary Fund predicts global economic growth will accelerate to 3.3 percent this year, from 3.2 percent in 2012.
As much as 30 percent of inventories may be tied up in financing deals and unavailable to consumers, according to Societe Generale SA. The accords typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when later-dated contracts cost more than those with nearer dates. To be profitable, the spread must exceed storage, financing and insurance. The LME’s monthly contracts are in contango through 2018.
Some producers are still making money, with OAO GMK Norilsk Nickel, the largest, expected to report an increase of about 50 percent in its most widely tracked measure of profit to $3.25 billion this year, the mean of 17 analyst estimates compiled by Bloomberg shows. Shares of the Moscow-based company fell 16 percent to $15.43 in London trading this year and will rally to $20.83 in 12 months, according to the average of 15 forecasts.
Sherritt International’s shares fell 25 percent to C$4.33 since the start of January and will reach C$7.23 in 12 months, according to the average of 10 forecasts.
Mining companies are adding the most new supply through a process known as high-pressure acid leaching, designed to handle lower-grade laterite ores. Output from six of them will more than double to 205,000 tons by 2018, Morgan Stanley estimates.
The surge in Chinese nickel pig iron is a growing threat because producers have cut overhead through new technology. Electric arc furnaces and rotary kiln electric furnaces with costs as low as $14,400 are superseding blast furnaces that made NPI at $23,000 a ton, according to Barclays, which cited data from Brook Hunt, a research unit of Wood Mackenzie Ltd.
The new NPI technology is also improving the quality of output, with nickel content as high as 15 percent, from 3 percent in 2006-2007, widening its uses across stainless steel grades, according to Barclays. China’s NPI production will advance 16 percent to 395,000 tons this year, Macquarie Group Ltd. forecasts.
“We still have massive infrastructure that have to be put in play in China and when you look at prices, they should be up from here,” said Jonathan Barratt, the chief executive officer of Barratt’s Bulletin, a commodity newsletter in Sydney. “But in the short term, you can’t get too excited.”
— With assistance by Sungwoo Park, and Helen Sun