Weekly Base Metal Macro Economic Slides
Base Metals LME Report by Natalie Scott-Gray
Natalie Scott-Gray
- Base Metals
Base Metal Commentary
By: Natalie Scott-Gray, Senior Metals Demand Analyst, EMEA and Asia region
NORNICKEL RELEASED ITS FIRST OFFICIAL MARKET UPDATE SINCE RUSSIA'S INVASION INTO UKRAINE
On 23rd May, Nornickel (the world’s largest producer of both palladium and class I nickel), released its first official market update since November 2021. In the below commentary, we highlight the key findings of the report and draw comparisons to the November release.
key topics of interest
- Nickel’s LME “Short Squeeze”
“As a consequence of the new position restrictions imposed by the Exchange, LME trading volumes and open interest have dropped to the multi-year lows as traders and investors are remaining on the sidelines and are rapidly cutting their exposure to the LME as a result of the March short squeeze”.
“The growing reluctance of market participants to trade in this market is also limiting further potentials of any sizeable short-selling activity. The decline in liquidity was accompanied by a lower speculative activity. In mid-May, net long positions of investment funds declined by over –60% comparing with mid-February, which reflects widespread unease among the market participants. However, one may see all this as a viable opportunity for the nickel producers and users to minimize the speculative component of the LME nickel pricing and start concluding deals based on the physical market fundamentals. An alternative pricing mechanism could be in sight for the physical market in order to avoid speculative price volatility”.
- Russian Production of Nickel for 2022 Remains at Previous Production Guidance
“In spite of certain challenges in logistics and deliveries of equipment, spares and consumables due to the complicated geopolitical situation, the Company’s operations remain unaffected.”
“ The company continues to fulfil all its obligations in full, our clients do not pull out of contracts, therefore, our trade and cash flows remain fully on schedule and in accordance with the existing contractual agreements. We see that our customers are keen to enhance their cooperation with the Company even further as Nornickel has proved its status as a highly reliable business partner through many decades of seamless co-operation and regardless of external geopolitical shocks.”
“Taking into account the current situation, Norilsk Nickel confirms the previously announced nickel production guidance from our own Russian feed for 2022 to be within the earlier announced range of 205-215 kt Ni.”
- Expectations of EU Russian Ban on Nickel Remains Low
“It is important to remember that the exclusion of Russian nickel from the trade system would be disastrous for the LME and the global nickel market as Nornickel’s share in high-grade nickel production was about 20% in 2021. The potential impact on the European market would be even larger given nickel’s essential role in achieving the long-term goals of the European Green Deal and carbon neutrality as well as the importance of the low-carbon nickel for the EU battery programme, which implicitly relies on Nornickel’s ESG-compliant metal”.
- The Impact of a Higher Price Environment for Nickel on Demand – What Can History Show Us?
“However, history shows that current prices are still likely to impact the demand negatively. In 2007, when nickel price averaged above $37,000/t, the market recorded a 4% decline in nickel use. Therefore, in our base case scenario, we expect the 2022 primary nickel demand growth to slow down to +11% as opposed to the 2021 level of +17% reflecting the current price environment, high inflation across major economies and uncertain macroeconomic outlook”.
SUPPLY & DEMAND FORECASTS - BROKEN DOWN
TABLE OF FORECAST NICKEL SUPPLY, DEMAND & MARKET BALANCE
Source: Nornickel
Supply
CHART OF GLOBAL PRODUCTION IN 2022
Source: Nornickel
TABLE OF GLOBAL PRODUCTION IN 2022
Source: Nornickel
In more detail:
Output to be driven by “huge growth” in Indonesian NPI capacities (1.1Mt, +33% Y/Y), in addition to growth from nickel compounds for EV batteries (the launch of HPAL capacities and NPI-to-matte conversion lines)
Production of Class II Material
• NPI output within Indonesia is set to reach 1.142 Mt in 2022 (with 0.428Mt domestically absorbed, 0.684Mt available to China and 0.03Mt for global export), meanwhile output in China is set to fall by 6% Y/Y given lower imports from the Philippines (which was partially offset by imports from New Caledonia, Guatemala and Cote d’Ivoire.)
• Ferronickel output is set to reach 0.394Mt in 2022 (+5% Y/Y), driven in part by the return of production at Eramet’s Doniambo and South 32’s Cerro Matoso. Meanwhile, Antam will launch and expand output from its second plant in Halmahera. By 2023, output should rise to 0.411Mt (+4% Y/Y) on the back of Onça Puma’s ramp-up to its designed capacity, Koniambo’s step-up after the second furnace restart, as well as the Burmese Tagaung Taung’s and the Japanese Pamco Hachinohe plant operations returning to their normal production rates.
• Nickel Oxide & Utility Nickel will expand modestly to 0.046Mt in 2022 (+11% Y/Y), driven by reinvestment by Punta Gorda in Cuba, in addition to resumption of production at the Matsuzaka refinery in Japan. Nornickel expects that total production in 2023 will remain relatively flat at 0.048Mt (+3% Y/Y).
Production of Class I Material
• NPI-to-matte conversion output is forecast reach 0.092 Mt in 2022. This will be driven by Tsingshan switching eight RKEF lines to matte production in Morowali (Indoneisa), in addition to CNGR and Huayou launching their own production later in the year.
• HPAL nickel capacity within Indonesia is set to reach 0.07Mt in 2022 (driven by output from the JV between Lygend and Harita, in addition to PT Huayue Nickel and Cobalt operations). By 2023, total output is set to jump to 0.15Mt (upon the ramp up of production from PT QMB New Energy Materials and PT Huafei Cobalt).
• Nickel sulphide production to reach 0.818Mt in 2022 (+5% Y/Y) and hit 0.832Mt (+2% Y/Y) by 2023, as major producers benefit from repairs and maintenances completed over 2021-2022. For more detail here (please see the original report here).
Demand
CHART OF CONSUMPTION GLOBAL IN 2022
Source: Nornickel
TABLE OF GLOBAL CONSUMPTION IN 2022
Source: Nornickel
In more detail:
Stainless Steel
• Chinese stainless-steel output to jump by 5% Y/Y, translating into a 10% Y/Y increase in primary nickel demand at 1,294Mt. It is forecast that 2.2 Mt of new capacity is to be launched in 2022 (1.7 Mt by Delong and
0.500Mt by a JV of TISCO and Xinhai). Despite high stainless-steel prices, 300 series production YTD has performed better than 200 series, highlighting little to no substitution.
• Indonesian stainless-steel output is set to expand by 12% Y/Y in 2022 to 5.600 Mt, translating into 0.428Mt of primary nickel demand (+12% Y/Y). Please note, Tsingshan is expected to ramp up 0.600Mt of new capacity in Morowali this year.
• European stainless-steel output is set to moderate this year at 7.000Mt, translating into 0.150Mt of primary nickel demand. The key driver behind this moderation has arisen from escalating energy and raw material costs, exacerbated by the military conflict in Ukraine. Meanwhile, high imports of stainless-steel into the EU from Asian countries is expected to continue over the year.
• U.S. stainless production is set to reach 2.400Mt in 2022, resulting in 0.035Mt of primary nickel demand. While business has remained robust so far this year, with mills being able to pass on higher raw material costs to the buyers, it is expected that activity will slow from Q3 onwards. Please note, in the longer-term, domestic output could be bolstered by the $1Tr Bipartisan Infrastructure Deal approved last year.
Batteries
- BEV and PHEV sales are forecast to amount to 7.100M and 2.800M units in 2022, translating into 0.480Mt of nickel demand (+27% Y/Y). By 2023, nickel demand is set to rise to 0.649Mt (+35% Y/Y), with BEV and PHEV units reaching 9.600Mt and 3.300Mt units respectively.
Alloys & Super Alloys
- “Demand for nickel alloys has been gradually recovering from the disruptions of the pandemic. The oil & gas industry is seeing now a resurgence in investments in upstream projects and this trend may continue into the future as supply chains will be shifting globally in the context of the European energy crisis. The largest 5 international oil companies plan to increase their CAPEX significantly by +30% YoY in 2022, maintaining the investment growth at +5-6% YoY in the years after. Considering the project bids won by the European and US mills since last year, we expect the use of nickel, especially in Inconel 625, to pick up in 2H 2022.”
- “Meanwhile, although jet engine deliveries are still below the averages of 2019, there have been significant improvements in order intake and shipments in 1Q 2022 by the mills producing superalloys, especially in the US and Europe, driven by single-aisle aircrafts serving domestic travel routes. In addition, nickel demand in superalloys continues to be supported by rising sales of military jet engines and industrial gas turbines for power generation. The conflict in Ukraine may further increase military spending in the NATO member-countries.”
WHAT ARE THE MAJOR CHANGES TO THE FORECAST SINCE THE NOVEMBER REPORT?
2022 consumption outlook remains almost unchanged
• Stainless steel +9% Y/Y (12% Indonesia, 10% China)
• Batteries +27% Y/Y
• Non stainless +8% Y/Y (strong oil & gas + aerospace)
2022 supply only marginally downgraded from 3.240Mt to 3,210Mt (20% growth down to 19% growth)
• Continued Indonesian NPI growth (+33% Y/Y)
• HPAL + NPI-to-matte (Indonesia, Australia, New Caledonia)
• Solid battery scrap
• FeNi downgraded to 5% growth in 2022 from 11% previously (high energy prices, geopolitical tensions in Eastern Europe)
Market Balance Lowered to 47,000t from 57,000t in November
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