Chinese stainless steel demand isn’t going anywhere. And it means that nickel demand, required for stainless steel production, isn’t going anywhere either.
The chart below shows stainless steel is a hot commodity. Demand has been somewhat stable since 2014:
Source: Global and China Nickel Industry Report
[Click to enlarge]
China’s primary nickel consumption hit 1.04 million tonnes last year. That’s an increase of 6.1% for the year.
The country accounted for 52% of global nickel consumption.
Battery demand made up 4% of demand according to Research in China. That’s not much. Electric cars haven’t really made an impact on demand yet. But that should change in the future. And that’s when nickel consumption should explode.
Keep in mind that Tesla, Inc. [NASDAQ:TSLA] boss Elon Musk said his batteries should be called ‘nickel-graphite’…not lithium-ion. Tesla Model S battery cathodes uses about 80% nickel.
Nonetheless, China uses most of its stainless steel for domestic needs, in particular as it applies to electronics and other appliances — all of which is dependent on nickel.
The continuing great migration from the countryside to cities should only fuel this trend.
The nuts and bolts
The Chinese are worried about depleting their higher-grade nickel inventory. That’s why they have boosted their ferronickel imports. Ferronickel is an alternative for nickel pig iron (NPI) and London Metal Exchange (LME) refined nickel.
NPI is a cheaper version of refined nickel metal from the LME warehouse. Refined nickel is quality nickel. To store the nickel in the LME warehouse, it has to meet specific standards.
As explained yesterday in Markets & Money, LME nickel is generally 99.99% pure. The Chinese don’t need that kind of percentage, as their NPI uses 4–13% nickel ore. That’s why cheap nickel ore is sufficient for their needs. In other words, the Chinese probably wouldn’t buy from the LME unless there was an emergency.
There’s no emergency at the moment. Ferronickel is typically 13–20% nickel. That makes more sense for the country’s stainless-steel needs. And why LME nickel stockpiles remain high:
Source: Kitco Metals
[Click to enlarge]
Looking at the above chart, there’s major support around stock levels of 350,000 tons. You can see that by looking at the green line. If support cracks, nickel prices could explode higher.
But, while that sounds exciting, let’s not speculate on that happening just yet. It might not happen for some time. The Chinese have opted for ferronickel as a replacement for their NPI.
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Reuters reported on 4 August (my emphasis added):
‘So far at least there’s been little impact on China’s imports of such material.
‘Indeed, imports of what China’s customs department classifies as Indonesian “ferronickel” broke through the 100,000-tonne barrier in May and stayed there in June.
‘Cumulative imports in those two months were 270,000 tonnes (bulk weight), exceeding total imports in 2015.
‘However, there is a sense that a producer pain point has been found in terms of pricing, which would seem to be an endorsement of those funds that came in at the May price lows.’
Let’s wind back the clock. You may recall the initial impact of the Indonesia raw-nickel export ban. The market didn’t believe the ban rumours straight away.
Indonesia said it would ban nickel ore exports in 2009. It never happened. Yet, with a ‘potential’ supply crunch on the cards, the nickel price eventually surged into 2012. That gave the country enough courage to ban raw exports.
The ban has been in place since 2014. Before the ban, Indonesia was the largest nickel ore exporter in the world. The market was left shocked when Indonesia made good on its promise.
Nickel prices skyrocketed.
But the price jump didn’t last for long. The Philippines came to the rescue for China, boosting nickel supply on the market. It sent the nickel price crashing to a fresh low.
Following on from yesterday’s analysis, Indonesia has partly relaxed its ban on nickel exports. I believe that’s because the Chinese lobbied them. Remember, the Philippines shut down a lot of mines late last year. Many of which have not come back online. That’s because the country is in no rush to do so.
Ferronickel has seen a lot of demand for that reason.
However, as per the Reuters article above, given it is getting costly, China might start building its own ferronickel, rather than directly importing it. If China starts building its own ferronickel, demand for LME nickel could skyrocket. That could send the nickel price higher. Remember, ferronickel contains about 80% nickel ore and 20% refined nickel.
There’s obviously a lot of speculation involved with this research. But the nickel supply environment faces major problems in the short term. That’s why the price is surging, as you can see:
Source: Kitco Metals
[Click to enlarge]
I’m certainly no nickel bull. I also have no idea how long nickel will keep rising. But, in going with the current market flow, the price could go a lot higher from here. And, right now, it’s hard to ignore nickel stocks.
Massive gains are potentially on offer if you buy the right nickel stocks. If you haven’t bought some shares in my favourite ASX nickel stock, I believe you’re about to miss out on potentially the biggest nickel opportunity of 2017.
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