Norilsk Commentary METAL MARKETS
Nickel in 2018 - deficit expanded to 130 kt (approximately 6% of global consumption) driven by resilient demand growth in stainless steel and booming battery sector; by the year end exchange inventories were down 47% (or -191 kt) to approximately 32 days of global consumption which was already below historical average; average LME price was up 26% year-on-year with some volatility in 4Q 2018 as bearish macroeconomic expectations and fears of China-US trade war prevailed in the market sentiment.
Strong industrial demand, primarily from stainless steel and fast growing battery sector, coupled with a steady drawdown of exchange stocks drove nickel price up sharply in 1H2018. On June 7, 2018, the LME nickel cash settlement price closed at $15,750 per tonne reaching the highest level since 2014.
However, in 2H 2018, the sentiment turned bearish on the entire base metals basket, where consumption growth is heavily reliant on Chinese demand as the expectations were building that the US-China trade tensions might end in a full-scale trade war. This negative sentiment was exacerbated by the news from Tsingshan of its plans to build an HPAL (high-pressure acid leaching) nickel plant in Indonesia in a joint venture with GEM, BRUNP, and Indonesia Morowali industrial Park with target capacity of 50 kt at an unprecedentedly low capital cost of USD 14,000 per tonne. As the reported capital cost was remarkably lower than any other similar HPAL projects realized globally so far, this implied a material downside risk to the long-held market consensus view on long-term incentive price. We hold a cautious view on the project as the announced project parameters and construction timeline (also unprecedented for this type of project of 2 years) are yet to be proven. Nonetheless, the weak sentiment dragged the LME price below $12,000 per tonne in 4Q2018.
The LME nickel price averaged USD 13,122 per tonne in 2018, up 26% y-o-y.
In 2018, global nickel consumption increased 7% y-o-y (or 112 kt) primarily on the back of strong stainless production growth in Indonesia. Stainless demand elsewhere was by and large unchanged, with China's consumption down 1% and the rest of Asia being flat, where a drop in stainless output in Taiwan was offset by marginal growth in Japan, Korea and India. Primary nickel demand in the European stainless sector was slightly down y-o-y and the US was flat.
Nickel demand from the battery sector increased by 40% y-o-y, with the demand from Li-ion batteries alone exceeding 100 kt in 2018. As the production of nickel sulphates (an intermediate product used in the production of battery cathodes) was lagging behind the demand, the consumers were tapping into nickel inventories. We estimate that 56 kt of briquettes were withdrawn from LME warehouses for the ultimate consumption in the battery sector. The battery demand growth was driven not just by the rising EV production volumes, but also by the technological shift of battery cathodes' chemistry towards more nickel-intensive formulations. Thus, if in 2016 the most popular technology was NCM 1:1:1 (with a share of nickel in the cathode material of 21%), in 2018, NCM 5:3:2 and NCM 6:2:2 became the prevailing cathode chemistries, with nickel share of cathode materials of 32% and 38%, respectively.
Nickel consumption in other sectors such as alloys, specialty steels and plating increased modestly by approximately 2% y-o-y.
Similar to demand, Indonesia was also the main driver of global nickel supply, which increased 7% y-o-y (or +150 kt). In 2018, the country exported 18 million tonnes of ore to China helping the recovery of Chinese NPI output to the 2014 levels of approximately 470 kt of nickel contained. In addition, Indonesia itself produced more than 250 kt of nickel in NPI as domestic NPI projects continued to ramp up and new projects were launched. Overall, global output of low-grade nickel increased 16% y-o-y (or by 170 kt) in 2018.
In a contrast to NPI, production of high-grade nickel decreased 2% y-o-y (or by 22 kt) in 2018 driven primarily by lower output in Canada. As we have been pointing out over the past couple of years, many conventional nickel mines were heavily underinvested, with CAPEX underspent inevitably to take its toll.
By the year-end 2018, the combined nickel inventories at LME and Shanghai Futures Exchange (SHFE) reduced almost by half to 219 kt from 410 kt owing to strong physical demand. We estimate that the bulk of stocks withdrawn from the exchange warehouses were consumed, as the apparent market deficit reached 130 kt. We believe that approximately 30% of all stocks withdrawn from the exchanges were relocated to off-exchange warehouses for strategic stockpiling by financial players and consumers anticipating consumption growth.
Nickel outlook - neutral; we expect persisting, yet narrowing deficits in 2019-2021 as Indonesia and China continue to increase NPI output; the demand from stainless sector is expected to be robust; EV story continues to be the key demand growth driver in the medium- and long-term as the xEV penetration grows and the share of nickel-intensive cathode materials keeps growing alongside.
In 2019, we expect the apparent nickel deficit to decrease to approximately 50 kt from 130 kt in 2018 as the ramp-up of NPI capacities in Indonesia and their recovery in China will outpace the growth of demand. We see however a risk to supply outlook, as the majority of holders of the export quota for laterite nickel ore have not been fulfilling their obligations to build local processing facilities. The market has already seen some friction in quota policy from the Indonesian authorities and we expect that it will continue to become more stringent, potentially capping the ore supply and hence, the NPI output in China.
We will be watching out for further announcements on large-scale HPAL projects in Indonesia as well as the status updates on the Tsinghan's 50 ktpa project. While we believe that laterite leaching could become one of the prospective alternatives to provide new battery grade nickel material, we consider it by no means being of low capital intensity and technological simplicity. HPAL projects have been notorious not only for their high CAPEX, which historically was in the range of USD 50,000 - 100,000 per tonne of capacity, but also for significant budget overruns and major ramp-up delays. In our opinion, the economics of laterite leaching projects drastically deteriorated recently as the by-product credit for cobalt (often contained in laterite ores) has reduced alongside falling payable cobalt price. We do not expect a recovery in cobalt price in the medium term due to a looming oversupply of cobalt intermediates.
In 2019, we expect a 4% global nickel demand growth in stainless steel driven mainly by Indonesia. Nickel consumption in specialty steels and alloys should increase by approximately 3% driven largely by aerospace, petrochemical and chemical processing industries.
In our view, nickel consumption in battery sector will increase by approximately 20% in 2019, which would be below 2018 growth rate as the shift to the NCM 8:1:1 formulation (nickel share in cathode material of 48%) will unfold gradually and could take a few years. Overall, we believe that EV penetration growth will remain the key driver for high-grade nickel demand in the next 5-7 years.
We also do not expect that potential trade war between China and the US could have a material negative impact on nickel demand as even if all nickel-bearing goods imported from China were completely displaced from the US market (~20kt Ni pa), manufacturers from other regions would fill the niche. The trade war could, nevertheless, possess a greater risk at the macro level impacting the income levels and echoing at the local nickel end-use in China.