Indonesia will play a central role in nickel market dynamics during 2018. From ore production and export through to stainless hot-rolled coil sales, China's financial pledges to Indonesian-based companies five years ago are bearing fruit.
Indonesia will produce 25% of the world's nickel ore in 2018, with a larger proportion than ever being processed locally to nickel pig iron (NPI). Most of that will be consumed by the world's newest and largest single-site stainless melting complex which, in turn, offers a serious threat to the long-established yet financially exposed stainless melt shops in the west.
While many in nickel's financial circles will remain preoccupied with the progressively important end-use segment of batteries, the industry focus this year should be on what the government of Indonesia says and what Indonesian companies do, such is the far reaching nature of the country's progress.
World mine output heavily exposed to Indonesia
Global mine output is expected to increase by over 10% for the second straight year in 2018. However, virtually all of the growth will come from just two countries: Indonesia, where mined production will increase by 50%; and the Philippines, which should rise by 10%. What Indonesia mines and exports not only drives NPI production at home and in China, but also reflects the rate of progress with domestic NPI projects, which form the large majority of the additional 100 ktpa finished metal capacity that should be online by 2020. Should any of these smelter projects fall short of their construction targets, the willingness of central government to re-issue their ore export permits, which are only valid for 12 months at a time, could be tested. As things stand, there are already permits in place to export 20 Mwmt of ore from Indonesia through to October 2018, with only around 4 Mwmt being exported to China in 2017, since the first permit was issued in March.
Indonesia's stronger contribution to nickel ore production will ensure the highest levels of NPI output ever seen, reaching a combined 700 kt contained nickel in 2018. China's output of NPI should match the former 2013-2014 peak of 480-500 kt, while Indonesia's domestic production will see an increase of 20% on last year, to 220 kt. Although this figure is dominated by Tsingshan's 150 ktpa capacity plant, Virtue Dragon's Konawe facility will be in its first full year of operation, on its way to 55 ktpa capacity by 2020. Five other NPI plants are already operating, and six more projects with a combined capacity of 60 ktpa are scheduled for commissioning this year.
Will NPI finally challenge traditional FeNi?
With NPI production being principally a Chinese affair since it arrived on the nickel scene in 2005-2006, traditional FeNi producers in the west have not been overly concerned by this potential source of competition. In those early days, Chinese NPI suffered from erratic chemistry, and the few attempts at finding export markets resulted in a reputation for poor quality. When Indonesia blocked ore exports in 2014, China could not spare any NPI for export and needed to rely heavily on FeNi imports instead; besides, the 20% export duty on Chinese NPI effectively negated the benefits of lower production cost.
But that duty was removed last year. Now that Chinese-funded, Indonesian NPI production is on the rise, we would not be surprised to see a stronger challenge to sales of western FeNi, both in China and elsewhere. Global FeNi production is expected to rise by 10% in 2018, to a record 440 kt, despite the demise of several small operators in recent years, with larger volumes coming from New Caledonia, Macedonia and Guatemala. So, while the quantities for sale should still be strong, FeNi pricing might face competition in the spot market from test parcels of Indonesian NPI. The fact that stainless melt production – the principal sales point for all FeNi produced - is expected to slow this year (approx. 0.5% growth, ex-China/Indonesia), will also not favour western makers of FeNi.
Sale of Indonesian stainless slab to US signals new trend
If it is a year or so early to predict contract sales of Indonesian (or Chinese) NPI to the west, sales of Indonesian stainless steel semis will become a reality this month, less than one year after the commissioning of the first melt shop, in Sulawesi. Tsingshan Indonesia will have 3 Mtpa of stainless melting capacity by the end of 2018, and no-one expects it all to go to mother China, following the ground-breaking deal between the company and ATI of the USA, struck late in 2017. Although the shipment of 250-300 ktpa of slab to ATI represents an important quantity in terms of the North American market, it still leaves Tsingshan with slab a-plenty to be sold elsewhere. Slab sales to China, which exceeded 200kt in 2017 alone, will put pressure on other stainless steel makers back home. Tsingshan's new, on site hot-rolling mill will, naturally, take most slab for conversion to hot rolled coil (HRC), also for export.
Tsingshan already has its sights on India as the next international destination for its slab output. While this contributes towards the stainless growth story that India is fond of relating, it will end all promises from Indian companies of melt capacity expansion from the flat rolled products perspective. It might even force one or two melt shops to close, given the long history of financial losses across the sector. This is the greatest threat of all to long-standing stainless melt shops, not only in India but also elsewhere in the west. With no anti-dumping duties on slab (or even HRC) to hide behind, and with Tsingshan's melt shop reaping the low-cost benefits of liquid chrome and NPI being fed directly into its furnaces, how can competitors operating smaller, older equipment seek protection from Sulawesi's stainless semis? The only answer lies in specialisation: to move away from the commodity grades of 304, 316 or 201 that will predominate in Indonesia. That might be achievable for some plants but for others, such as in India, where these are the staple grades, such a strategy might not be feasible.
China promotes EV batteries as next generation nickel sector
After more than a decade of establishing industrial policy and trade dynamics to favour the development of NPI and stainless steel, China is switching focus towards the nickel industries of the future: raw materials for rechargeable automotive batteries. In mid-December, China's Ministry of Finance announced some interesting tweaks to import taxes designed to promote the use of certain nickel materials over others. The import tax on nickel cathode for smelting purposes doubled from 1% to 2%, starting January this year, but remained at the lower amount for cathode more suited to plating/sulphate applications. Also, the import tax on nickel sulphate was cut by more than half, from 5.5% to 2%. With local sources pointing to the fact that over 60% of imported nickel sulphate is used in the production of ternary materials for NCM/NCA batteries, it is evident that China is laying the ground to support her capabilities in this field.
Complementing this support for battery materials are similar modifications to the subsidy regime for electric vehicle (EV) sales. The headline since 2016 was that all central government subsidies on EVs will end in 2020. This was followed by a new policy, announced in the final week of 2017, that EVs with shorter driving ranges (<150 km) would receive no subsidy at all from 1 January 2018. This created the impression that Beijing wanted all EV subsidies to end. However, two graded subsidy programmes remain in force through to 2020, with vehicles having a range of up to 300 km receiving the current financial support, and those with a range exceeding 400 km receiving a higher subsidy. Equally, minimum power-to-weight requirements have been increased from 90 W/kg to 105 W/kg, with the full subsidy only applying to vehicles with 140 W/kg. Encouraging automakers to produce vehicles with longer ranges translates into using battery types containing a higher nickel content. This dovetails well with the reduced import tax on nickel sulphate from the start of 2018.
Widening premiums on nickel for chemicals
With China already scouring the globe for nickel units suitable for battery/chemicals applications, we have seen the initial attempts of several western nickel producers to make such products more available, often at the expense of their more customary products (eg, powders or sulphate, rather than briquettes). But this will take time to advance. Meanwhile, the LME, recognising the price pressure now falling on consumers of nickel chemicals, is assessing the feasibility of introducing new contracts dedicated to nickel (and cobalt) sulphate. A decision will come this year for a 2019 launch. As we wait for this to become a reality, we can expect continued disparity between the market conditions for melting grade nickel products and those for plating/battery chemicals, as reflected in regional spot premiums. Contract premiums for both product sets, compared with 2017, have already flared out for 2018 across all regions, but the move up for chemicals has been sharper.
Although we believe that global EV battery production and auto sales are not quite increasing as fiercely as some market observers suggest, the call for raw materials to make those batteries, by necessity, has to come first. That moment has now arrived, albeit a year or two ahead of the volumes that specialist suppliers can actually make available. While we wait for new dedicated chemicals product streams to come online, we expect some current nickel product flows to be re-directed. As a result, customers who have not yet locked in their 2018 requirements may face higher costs to get the metal they want, and even then, might not get everything that they need.