Wood Mackenzie ponders nickel outlook

The nickel sector was caught a little off guard last month when an Indonesian press report claimed the Southeast Asian nation intends to bring forward its proposed ban on nickel exports by as much as two years, from January 2014 to as early as May 2012.

The ban—first announced in 2009—is intended to encourage the domestic processing of ore into higher value products, which means integrating existing nickel mines with a smelter to produce matte, ferronickel and nickel pig iron, thereby boosting government revenues. The proposed ban is also designed to prevent uncontrolled mining at small operations in the country that may be exporting material illegally and aren’t large enough to warrant their own processing facilities.

“Indonesia has its foot on the throat of the nickel industry,” Andrew Mitchell, principal nickel analyst with U.K.-based energy and metals research firm Wood Mackenzie said during an interview earlier this month at the Prospectors and Developers Association of Canada convention.

“The question is will they really do it and I think everyone thinks that they won’t,” Mitchell concludes. “The issue is they don’t have the infrastructure. They haven’t got the rails or the power supplies so to build plants in Indonesia will be very expensive.”

Mitchell also pointed out that there are no smelters currently under construction in Indonesia that could be finished before 2014. The nickel analyst elaborated on the challenges facing Jakarta in a February research note to clients.

“A handful of Chinese companies are associated with such plans [to build smelters in Indonesia] but the remoteness of many prospects and the need for infrastructure in order to develop them signals that achieving even a 2015 deadline would be a challenge requiring substantial investment,” he reasoned. 

“Suggestions that an export tax could be introduced in the interim are unconfirmed although this option could be an acceptable compromise, with an outright ban following in later years,” he argued in the report. “An alternative possibility is that joint venture arrangements with Chinese nickel pig iron companies could be established with an Indonesian mine supplying ore feed to a Chinese nickel pig iron plant and a share of the revenue generated from nickel pig iron production being returned to Indonesia.”

If the ban does go ahead it would have a particularly significant impact on China, which imported about 53% of its nickel ore from Indonesia last year, which it uses to make nickel pig iron, the Bloomberg news agency reports, citing customs data. Bloomberg also puts Indonesia’s 2011 nickel production at 15% of the world’s total (with its refined nickel output representing just 1% of the global output), according to figures from Barclays Capital.

Mitchell concedes that uncertainty over the Indonesian ban makes it difficult to forecast nickel supply and demand over the next few years and what will happen to nickel prices. But what he does know for certain is that the sector is moving toward a situation of structural oversupply with Ambatovy (60,000 tonnes per year) and Tagaung Taung (22,000 tonnes per year) due to enter production this month and Koniambo likely to start up by the end of the year. VNC, formerly Goro (55,000 tonnes per year) is ready to start producing nickel oxide sinter and Barro Alto and Onca-Puma are progressing with ramp ups after switching on last year. He calculates that those six plants alone are expected to bring nearly 300,000 tonnes of new nickel to market, or about 16% of forecast world finished nickel production this year.

“That’s a lot of metal for the space to absorb in such a short space of time,” he told The Northern Miner. “Even with conservative ramp-up periods, we’re still looking at an oversupply situation and downward pressure on prices for the next four or five years.”

Currently Mitchell forecasts nickel prices in 2012 of US$8.38 per lb. and US$7.89 per lb. in 2013. (Last year the nickel price averaged US$10.39 per lb.)

Of course like all forecasts there are many variables at play. If Indonesia does proceed with its ban in May—two years ahead of schedule—it is possible that a big portion of nickel pig iron production could be lost in the next 12-18 months, he says.

“As 60-70% of nickel pig iron production is based on ore feed imported from Indonesia such losses could have a profound impact on our future balances,” he outlined in his report. “Equally, if looming oversupply pushes nickel prices down quickly and to a low enough level to enforce the closure of marginal operations—which would also affect nickel pig iron—that too would tend to bring the market back to balance sooner than we show in our forecasts; and prices as low as $16,000-$17,000 per tonne would be low enough to precipitate such reactions.”

“Either scenario may allow prices to either remain higher or begin to recover sooner than we currently forecast,” he concludes. “Thus, although potential oversupply indicates that a fall in nickel prices this year may only be a precursor to still lower prices in 2013, there is also scope for greater optimism next year.”