Storage wars come to nickel

Indonesia has decided to enforce its ban on unprocessed ores for some producers, which is particularly important to the nickel market.  The use of Indonesian ores in the production of nickel in China has been the key factor contributing to the oversupply of nickel in the last few years and removing its availability has big implications for supply.

For a surprisingly detailed rundown from the Glencore perspective, this recent presentation has some great charts and tables on the costs and production rates of nickel pig iron (NPI) in China.

In particular, on the left is a table of Glencore estimates for Chinese NPI production this year. This compares to an estimated market surplus of a little over 200kt in 2013.

A dramatic reduction in NPI production would have a big impact on the market balance for nickel. But this market has been in surplus for a number of years, so its important to consider the inventory situation before contemplating what the impact is on prices.

LME inventories have been built to the highest levels in terms of days of consumption since the early 1990s.  But like other base metals, this stock has been increasingly concentrated into two locations in Johor and Rotterdam.

This will create queues for metal once the market balance has been tipped into deficit, a bit like the situation seen in copper in the second half of 2013 or like for Aluminium financing demand. But for nickel this will be further compounded by the fact that Rotterdam in particular has a lot of other metal in storage.  While inventory held is large compared to the nickel market, it is not the dominant metal at this location.

The LME rule changes do try to recognise this for small volume markets like nickel and tin, although the required additional load-out of these additional metals are very low at just 60tpd.

Cancelled warrants have already jumped even though the market has been in surplus, perhaps in anticipation of queues.

The warehousing situation seems likely to amplify any squeeze that might occur as a result of a loss of Indonesia ore.  This will probably initially be reflected in premiums before prices move to levels that would be good news for producers.