Major production cuts and a substantial draw-down of exchange inventory are needed to trigger a sustained price recovery in nickel, despite a likely market deficit this year, Russia's Norilsk Nickel said Tuesday.
"Nickel industry restructuring seems to be picking up pace in 2016. With some production cuts (mainly in China) already announced in 2015 and further production cuts scheduled in 2016, we also see a substantial amount of high cost nickel operations have been put up for sale," the world's largest nickel producer said in its 2015 results statement.
"We however feel that at least some 20%-25% of the global supply needs to be cut for the nickel price to enter into a sustained recovery," Norilsk added.
The company expects global primary nickel consumption to remain unchanged in 2016 at around 1.9 million mt and the market to develop a deficit of 70,000-90,000 mt.
"As the global nickel exchange inventory runs at historical highs of approximately 500,000 mt, we feel that the price reaction to production cuts could be sticky until a major draw-down of inventories is materialized," Norilsk said.
PRICES
Nickel prices on the London Metal Exchange hit their lowest level since 2003 in December, with average prices for 2015 as a whole down 30% year on year, the company noted.
The impact of low nickel prices was, however, partially softened by weakening of mining currencies combined with falling oil prices, which allowed for average nickel cash costs to fall almost 20% year on year in 2015, Norilsk pointed out adding that "the perceived lower cash costs, despite still being above market price for a substantial part of the market, were part of the sentiment contributing to the weakness of nickel price in 2015."
"We do not believe that the nickel price is sustainable at the spot level in the long run and we neither see much further downside as the nickel price is already extremely deep into the cost curve," Norilsk said.
"With US dollar strengthening/mining currencies depreciation as well as the oil price having stabilized by now, we believe that further reduction of the cost curve should end by and large (and thus the lowering of the support for nickel price)," it added.
Last year, the bulk of nickel supply demonstrated very low price elasticity, the company said.
"In spite of 60% of global nickel production making cash losses during H2 2015 the production cuts were surprisingly small and came mostly from the Chinese NPI (nickel pig iron) producers (100,000 mt out of 125,000 mt cuts in China)," Norilsk said.
The company attributed the lack of supply response to multi-year price lows to a number of factors: "sponsorship" of loss-making nickel operations (such as global diversified miners, governments, downstream integrated producers or strong private financial backers); high barriers to exit in certain jurisdictions (high rehabilitation/mothballing costs); low cost of refinancing balance sheets, ample financial liquidity and little propensity of commercial banks to trigger bankruptcies; and expectations for an imminent recovery of the nickel price.
"At the same time, we estimate that the nickel consumption last year in China remained robust (plus 3% year on year) supported by the output of nickel-intensive 300-series stainless steel, which was up 5% year on year," Norilsk said.
Imports of both refined nickel and ferronickel to China jumped by 130% and 80% year on year respectively, "confirming the hypothesis that China's domestic nickel market was in deficit as lower nickel units production (mainly in the form of NPI) had to be substituted by imported material while the demand was up," the company said.
INVENTORY
Meanwhile, the movement of refined metal inventory in 2015 and the prior year "was often a result of the metal reallocation from one warehouse to another, but not a reflection of the underlying market surplus or deficit," the company said.
The reallocation of opaque Chinese nickel inventories from bonded warehouses to LME warehouses resulted in a significant increase of LME nickel stocks, which hit 441,000 mt at the end of 2015.
"At the same time, a substantial amount of nickel was moved to Shanghai Futures Exchange warehouses, which launched nickel trading in May 2015, and which accumulated by the end of 2015 almost 50,000 mt of metal," Norilsk noted.
"A lot of nickel was moved between LME warehouses, with the cost of storage often driving these relocations," the company said, adding that while a market surplus did contribute to some increase in the total exchange inventory in 2015, it was not a major driver.
"The market, however, often misinterpreted the growth of inventory as a signal of weak demand from the Chinese stainless industry," the company said.
