Norilsk's Potanin Says Fed Rate May Aid Worst-Performing Metal

  • Cheap money had aided unprofitable nickel production, CEO says
  • Next year will still be challenging, but prices should recover

The billionaire chief of one of the world’s biggest nickel miners said the first U.S. interest-rate increase in almost a decade may be good news for the metal that’s trading near a 12-year low.

While higher rates tend to strengthen the dollar and make commodities priced in the currency more expensive, an increase in borrowing costs may encourage some mining companies to cut unprofitable production, said Vladimir Potanin, the chief executive officer of GMK Norilsk Nickel PJSC.

Vladimir Potanin
Vladimir Potanin
Photographer: Jason Alden/Bloomberg

“Just like the commodities supercycle is over, the cycle of cheap money is also coming to an end," Potanin said in interview near Moscow late Wednesday. “The excessive amount of cheap and easily available money” has allowed some companies to keep producing at a loss and contributed to metal oversupplies, he said.

Fed Chair Janet Yellen emphasized further tightening would be slow after Wednesday’s quarter-point increase in rates, which had been held at a record low since the financial crisis in 2008. Metal prices have slumped this year as China’s economic slowdown curbed demand after years of heavy investment in new production. Nickel has plunged 43 percent this year, the worst performing main contract on the London Metal Exchange.

Morgan Stanley estimates that this year’s nickel supply surplus at 64,000 metric tons and that about 70 percent of output is unprofitable. Norilsk, which together with Vale SA was the biggest producer of the metal last year, mines sulfide ores in Russia, which, together with a weaker ruble, have helped the company keep costs down.

The metal declined 1.1 percent to $8,655 a ton by 12:13 p.m. on the LME. It reached $8,145 last month, the lowest since 2003.

Potanin said nickel prices failed to react to a decline in stockpiles since the middle of the year. Inventories tracked by the LME fell 16 percent from June to Dec. 9, before rebounding, bourse data show. The market is also paying too much attention to China’s slowdown and will soon get used to the lower rate of growth in the world’s biggest consumer, he said.

Unprofitable Output

While much nickel is being produced at a loss, miners have been opposed to idling output in the hope that they can keep operating if prices recover, Potanin said. Asian governments have been subsidizing unprofitable supply and large, diversified producers’ losses in nickel have been compensated by profits elsewhere, he said.

"All those factors will go away sooner or later" and the market will find a better balance, Potanin said. While next year will remain challenging and there’s a possibility the rout may deepen, Norilsk’s base case scenario is for higher prices than now, he said.

The company has become the world’s third-largest mining group by value, after BHP Billiton Ltd. and Rio Tinto Group, partly due to its turnaround program and because it doesn’t mine iron ore or coal, lower prices of which have hit producers’ profits, Potanin said.

Norilsk is the biggest producer of palladium and also mines copper. The situation on the platinum and palladium markets "is much easier" then in nickel, as those metals have structural deficit and the situation with the prices should become stable, Potanin said. The miner also believes in the copper market recovery after 2018, he said.

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