Nickel glut extends to fourth year on China supply

Electric Furnaces

Production from China’s most advanced rotary kiln electric furnaces reached 50% of NPI output this year and will rise further, said Fan Runze, an analyst in Beijing at Antaike, a unit of the China Nonferrous Metals Industry Association.

Output by traditional blast furnaces dropped to 10% of total supply while electric arc furnaces provided the remaining 40%, he said. Rotary kilns use 40% less electricity than older furnaces, according to Fan.

OAO GMK Norilsk Nickel, the largest producer, will report a 5.3% decline in profit to $2.06 billion this year, according to the mean of 10 analyst estimates compiled by Bloomberg. Shares of the Moscow-based company, which derives 43% of its sales from nickel, fell 14% to 4,832 rubles this year. The stock will rebound to 5,727 rubles in 12 months, the average of seven forecasts shows.

Anton Berlin, the marketing director of ZAO NormetImpex, a unit of Norilsk Nickel, estimated about a month ago that as much as 40% of global production is unprofitable. Nickel stockpiles in warehouses monitored by the LME jumped 65% this year to a record 230,760 tons.

Export Ban

More supply will come in the next several years from projects including Glencore Xstrata Plc’s Koniambo, Anglo American Plc’s Barro Alto and Vale SA’s Onca Puma. Global mine supply won’t contract until 2018, Morgan Stanley estimates.

China’s NPI production may be disrupted by less supply of ore from Indonesia, where the government has proposed an export ban to promote domestic processing. Indonesian imports accounted for more than half of the lower-grade feedstock needed for NPI in the first eight months, customs data show.

Macquarie’s Lennon, who has followed nickel for more than three decades, said at a September conference in Jakarta that the chances of a total ban were low because it would destroy jobs in producing regions just before elections.

Indonesia roiled the tin market this year by obliging all metal for export to be traded through a local exchange, challenging the LME’s dominance. Prices surged 27% in three months. PT Timah, Indonesia’s largest producer and shipper, declared force majeure on cargoes and the nation’s monthly exports in September slumped to the lowest since at least February 2007, when the government began monitoring sales.

Selective Ban

A selective ban on companies that haven’t shown progress in plans to build local nickel smelters is possible, Deutsche Bank AG analysts including Michael Lewis wrote in a report Sept. 26. Three Chinese companies signed agreements to build NPI plants in Indonesia and one has begun construction, Fan of Antaike said.

Chinese mills are likely to turn to the Philippines for low-grade feedstock if shipments from Indonesia are interrupted, according to Fan. He said ore stockpiles at Chinese ports were big enough to meet several months of demand. China now produces about half the world’s stainless steel, from less than 13% in 2005, according to data from the International Stainless Steel Forum in Brussels.

“The industry is on the road to NPI and it’s irreversible,” said Ren Gang, who buys and sells metals in Shanghai for Qingdao Youbangyuan Trading Co. “It’s all about costs and orders coming from clients.”

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