Influencing factors

Since early November, nickel pricing has been characterized by ups and downs, albeit with robust support. The 2016 high of $12,145 per metric ton as of mid-December was reached Nov. 11, 2016. But after reaching the high, one or two corrections were made on the London Metal Exchange (LME). The year’s high has not been reached again, but after a dip down to a low of $10,845 per metric ton, prices could swing back again to a high of $11,900 per metric ton only to again make another correction.

The main factors influencing movements were the U.S. currency development, U.S. economic data and comments of central banks around the world promising, at least for Europe, a continuance of the expansive monetary policy. Reflecting this, the Deutsche Boerse Ag German Stock Index (DAX) was able to climb up to an index level of 11,000 points.

Overall, nickel prices over December have traded well above the $11,000-per-metric-ton level; at the moment, this important alloy commodity is around $11,300 per metric ton. Meanwhile, there is little change in fundamentals. Demand for stainless steel and its corresponding raw materials is still good, and scrap availability is profiting from higher prices. Not only nickel is proving to be a bit firmer, but the price of iron is at an imposing level, and chrome is seeing higher levels as well. Only molybdenum is somewhat lackluster now.

Winds of change in China

The progression of the stainless steel market recovery, certainly overdue, has a lot to do with China. Not only because more than 50 percent of stainless steel produced globally is now produced there, but also because the raw materials used are subsidized, causing huge excess production of steel and stainless steel. In the past, this surplus output has been forced into Europe, making life difficult for European (stainless steel) producers. The anti-dumping measures taken by the European Union and by other countries in the world have started to take effect. However, these can be seen only as a temporary protection, for it is the conduct of the Chinese economy that has to change. Up to now, it had been firmly believed that economic realities could be overridden permanently. And, already reported and greeted here, it seems the time is now ripe in China for a rethink.

Metal Bulletin has reported that the stainless steel works of Jiangsu Delong Nickel Industry Co. Ltd. in Yancheng, China, has been completely demolished, just a week after China’s provincial government had ordered its closing. Let it be noted that, according to information, it is a steel works with 2 million tons of 304 production capacity. The television network Jiangsu Television reported that the demolition was started Dec. 5, 2016, and finished by Dec. 8. One commentator spoke of symbolic politics: The efficiency of the demolition should show how serious the government is in trying to remove excess capacities in the steel sector. One consequence in China is that the stainless steel price has moved up already and higher prices are expected for 2017.

This can only be good and right. A dumping policy does not help the consumer in the long run. Costs have to be covered, and in an efficient economy a return on investment has to be possible.

The names Shandong Jinhaihui Technology and Gansu Lanxin Steel Co. also have been mentioned in connection with further closures.

It is now known that the steel works of Jiangsu Delong did not have the appropriate environmental approval to produce its own nickel pig iron (NPI). After the demolition, the works no longer need this. Speculation, therefore, becomes certainty.

Apparently a new wind seems to be blowing in China, but not the storm promised by the Chinese government for U.S. President-elect Donald Trump after his telephone call with Taiwan and his challenges to the One China Policy.

On to Indonesia

The Indonesian government has been proven right in doubting its export ban of unrefined nickel ore, which has been in place since the beginning of 2014 and with significant consequences. Economically, Indonesia has shot itself in the foot. Jobs have been lost in Indonesia, while the tonnage that China still needed was covered by increased production in the Philippines. But it has to be said that the environmental conditions in Indonesia were no longer tolerable and still are not in China. Also, the value creation and profits were not shared fairly between the two countries. So, it seems more than right that the Tsingshan Group reports that the third phase of its high-grade (more than 10 percent nickel content) NPI works also has successfully started its trial run in Indonesia. By April 2017, an additional 300,000 tons of NPI (approximately 30,000 metric tons of nickel) should regularly come from this third part of the project.

According to calculations by Metal Bulletin, the Sulawesi Project (a massive NPI project on Sulawesi Island, Indonesia) has a total capacity of 1.2 million tons of NPI, whereby 900,000 tons should have been in operation since the end of 2015. This is the only way forward if a sustained environmentally friendly stainless steel production is to be maintained in this region. Raw materials, which are subsidized artificially by money or by inferior standards, are not a long-term solution, especially when they cause market equilibriums to go into disarray and market forces are impeded.

Looking to the new year

Looking toward 2017, analysts of the Australian commodity and investment bank Macquarie have taken the trouble of summarizing important influential factors, from their point of view, that should be considered for 2017 so that certain deductions can be made about further developments. The comparative strength in the commodity markets in 2016 is described as being surprising. But at least for stainless steel, the appendage “and justified” should be added. In turn, Macquarie is less surprised that, again, in 2017 much will depend on how China moves on. At least a continuation of the positive commodity climate is expected for a further six months, but with a warning given that such a phase will not last forever.

Concretely, it is about the following: Governmental policy anxiously stood between dissatisfied voters and a shaky growth rate while trying to support the economy with appropriate fiscal and monetary stimuli. This helps not only commodities but all financial investment goods equally. The first half of the year will show what the nationalistic policy of President-elect Trump’s government in the United States could look like, and the second half of the year will be decisive for which Five-Year Plan Chinese President Xi Jinping will launch. 2017 also will give more clarification about whether the eurozone will stay together or grind to a halt.

Furthermore, the growing protectionist movements have to be watched. A fragmentation of prices could be a consequence. Trade will be more difficult, and the necessary capacity adjustments in some industries could be delayed.

While 2016 was indeed not a boom year, with a growth rate of just 2 percent more or less, it was still certainly better than the 0 percent of the previous year. However, analysts do not reckon with a weakening position in 2017; their view is of a more robust situation. Inflation in China could become a topic in 2017. If at first it makes for positive support in commodities, after the central bank takes the appropriate counter measures, it could result in a dampening in commodity demand, followed by a dampening in prices.

It remains to be seen whether there will be more regulatory interventions in China in the futures markets that will go beyond the government’s own statements. A reduction in volatility would be faced, with private and financial investors not supporting prices as much. Other factors are China’s construction activities, which, according to Macquarie, are at a crossroads; the development of the growth rate on the part of commodity supply; and the possible return of production losses because of neglected maintenance. A few more important points are mentioned: environmental regulations for commodity production, for example, in China and in the Philippines; temporary highs in demand; the development of the oil price as “reference” for commodity sentiment in general and as an influence on costs; and the currency development of the U.S. dollar and Chinese renminbi.

As can be seen, there is a complexity of very different parameters that Macquarie Bank puts together in a nutshell in its prognosis, which is: $11,625 per metric ton for nickel, $50 per metric ton for iron ore and $1.03 per pound for ferrochrome. And, reliable as ever, reality will once more overtake predictions also in 2017.

This is an edited version of “Oryx Commodity News” dated Dec. 12, 2016. It is published with permission from Netherlands-based Oryx Stainless Group (www.oryx.com/en).