The 21st century will see emerging markets dominate the world.
Incredibly, emerging markets already contribute half of the world’s GDP — a portion which will only increase. Ken Wangdong, our Emerging Markets Analyst, is well aware of this trend. And he’s making his subscribers some big gains from it…you can check out his work here.
Like myself, Ken realises that sooner rather than later, we’ll see a change of the guard — the US Empire will be surpassed by China. In my view, the Chinese economy will double in size over the next decade.
And this means greater demand for commodities. Indeed, we’re only half way through this multi-year commodities super-cycle.
China is a growing powerhouse, there’s no doubt about it.
China’s population totals over 1.3 billion people — enough to fuel its own economy. This is why China is transitioning from an investment-driven (i.e. infrastructure growth) to a consumer driven economy (i.e. services growth).
While the economic shift occurs, one resource which will benefit the most — nickel.
Unlike most other commodities, China requires nickel for both its investment and consumer driven economies. People are demanding a better standard of living. This means more home appliances, vehicles, electronics, new factories, and restaurants…all dependent on nickel.
Nickel will be the hottest sector this year and next year. I explain why here.
Chinese NPI production to fall by 30% this year
A few weeks ago, I discussed the impacts on the Indonesian raw nickel ban export policy.
Needless to say, China wasn’t even slightly impressed with Indonesia’s decision.
China is the world’s largest producer and consumer of nickel. So it’s worthwhile noting that, unlike other commodities such as iron ore, China consumes much of the nickel it produces. It needs all the nickel that it can get its hands on.
Thankfully for the Chinese, Philippine exporters stepped in to meet the demand.
The Filipino’s provided China’s NPI (nickel pig iron) producers with a critical lifeline — supplying the nickel ore that it needs. NPI is used in the production of stainless steel. It’s a cheaper alternative to the refined nickel that you’ll find at the London Metal Exchange (LME) warehouses, and ferronickel in China.
Whilst this may sound like great news for the Chinese, there’s one big problem that’s looming — declining nickel ore stockpiles.
Chinese NPI producers are running out of higher grade Indonesian nickel ore stockpiles. The Chinese realise that this is coming. And because Indonesian ore is lower quality, they’ve been blending both ingredients to get the desired product.
But the blending operation simply won’t last.
Around June, the Chinese should start running out of Indonesian stockpiles.
The question then becomes, what happens next?
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Given the nickel environment, it’s likely that the Chinese will rely solely on the lower grade Filipino nickel ore. However, doing so should see NPI production decline by 30% this year. This isn’t great news in the face of rising stainless steel demand.
When Indonesian inventories are out, we’re likely to see the nickel spot price start to shoot up towards US$16,000 per tonne. This should happen within the next five months. Depending on the demand situation later this year, we could see the nickel price hit US$20,000 per tonne by year’s end.
Traders are aware that something is brewing in the background. The nickel price now stands at US$14,130 per tonne. It’s jumped roughly 13% since I explained everything in the ‘N3 Eclipse’ report, only a few weeks ago.
The point is, don’t waste your time watching LME inventories — for now anyway. Furthermore, it’s likely that Chinese stockpiles will remain high in the future. The Filipinos are flooding ports with their lower grade ore — the stuff those NPI producers don’t want.
The focus here is purely on Indonesian nickel ore inventories. Declining Indonesian stockpiles explain why the nickel price is moving up at a time when LME stockpiles are also rising.
According to Celia Wang, an analyst at Beijing Antaike Information Development Co., current Chinese stockpiles of nickel ore, refined nickel and ferronickel can cover three months of the country’s stainless steel production.
Looking at the bigger picture, Antaike forecasts Chinese NPI production will be restricted to 360,000 tonnes this year; down from about 485,000 before the Indonesia ban.
This is a problem…
The Chinese are hungry for stainless steel
Chinese stainless steel demand isn’t going anywhere anytime soon.
The chart below shows that stainless steel is a hot commodity. The forecast was that China would buy more than 57% of the world’s total supply in 2014 — and their consumption is still growing.
Source: Jinjiang Mining Fund
China is using all this stainless steel for domestic needs. The great migration from the countryside to cities will only fuel this trend in the future.
The Chinese are clearly worried about depleting their higher grade inventory. This year they’ve boosted their imports for ferronickel, an alternative for NPI and LME refined nickel. You can see this looking at the last three bars on the following chart.
Source: Asian Metal
Chinese net imports of this form of nickel surged by 40% last year. And were up another 74% in the first three months of 2015. If this trend continues, you’re looking at over 624,000 tons of ferronickel being imported this year. That’s unsustainable.
In 2013, global ferronickel production was 320,000 tonnes. Based on my numbers, that’s only half the amount that the Chinese are trying to import this year.
Can China produce the rest of its needs?
Ferronickel contains about 80% nickel ore and 20% refined nickel. Therefore, if China increases its own ferronickel production, you’re likely to see more demand for Chinese ore inventories — pushing up the spot price.
According to the latest statistics released by Asian Metal, China produced 26,900 tonnes of ferronickel in April — up by 8% from February. At this rate, they’re looking at producing roughly 600,000 tonnes of ferronickel. Sufficient to cover the deficit.
Unfortunately for them, this won’t happen.
Last year, Chinese Premier Li Keqiang declared ‘war on air pollution’. Last month he repeated that he would do all he could to fight pollution.
China is serious about reducing air pollution — Beijing recently bid for the 2022 Winter Olympics.
China has introduced a strict stance on environmental protection. And several steel, ferronickel and NPI producers have already closed. This indicates that the government is stepping up enforcement of new environmental laws.
Linyi City has seen the most closures. It’s a major producing region of low-grade NPI in China…around 25% of the nation’s total.
Looking at the investment picture for nickel stocks and the recent nickel environment, Indonesian higher grade stockpiles will be virtually gone around June. From there, you’ll start to see the spot price increase. Ferronickel imports and production will increase into the end of this year.
Most likely, based on this new evidence, we’ll see the market balanced by the end of this year. Supply should just meet demand. Albeit, nickel prices will be higher to reflect the incoming deficit.
This deficit should come during a time of geopolitical tensions and rising conflict. The best way to play this is through the commodities sector, and with nickel stocks specifically. Check out why here.
Resources Analyst, Resource Speculator