Short-term pain, long-term gain: Indonesia could plug nickel pig iron gap
By Mai Nguyen
SINGAPORE, Sept 2 (Reuters) - Indonesia may be able to plug an expected shortfall in nickel pig iron (NPI) supplies caused by its nickel ore export ban starting next year by boosting its own capacity to produce the semi-finished metal used to make stainless steel.
China, the world's biggest nickel user, has traditionally imported nickel ore from Indonesia, the world's biggest ore producer, to produce NPI to make stainless steel. But that supply chain will be disrupted by the ore export ban set to start on Jan. 1, part of Indonesia's push to develop a higher-value domestic metal processing industry.
Indonesia accounted for 26% of global nickel ore supplies last year, according to the International Nickel Study Group (INSG), but since 2016 has ramped up production of NPI, an intermediate product containing around 10% nickel used by stainless steel mills.
The increase in NPI production has mostly come from Chinese companies operating in Indonesia.
From nearly zero in 2014, Indonesia's NPI output climbed to 261,000 tonnes a year in 2018, according to data from Australia's Macquarie Group Ltd.
That could climb to as much as 530,000 tonnes in 2020, according to estimates from Chinese trading firm Grand Flow Resources.
"It is estimated that the annual increase of nickel metal content in NPI will be 130,000 tonnes a year. The high speed expansion will extend from 2020 to 2021," said Wang Chongfeng, an analyst at Grand Flow Resources.
Energy and minerals consultants Wood Mackenzie forecast that by 2021, Indonesian NPI output will surpass China's, which is estimated at 570,000 tonnes this year.
"It is possible some, and ultimately all, of the lost NPI production in China could be offset by NPI production increase in Indonesia – but this will take some time," said analyst Linda Zhang of Wood Mackenzie.
The expected disruption of ore supply and the resulting curtailment of Chinese NPI output has caused nickel prices to surge.
London nickel CMNI3 rose to a five-year high on Monday and has leaped over 70% this year, while Shanghai nickel SNIcv1 hit a record as markets feared the stainless steel industry, which consumes 70% of global nickel output, will lack supplies.
Indonesia in 2018 produced 289,868 tonnes of primary nickel, which includes NPI and other nickel products, a 42% surge from a year earlier, but consumed a lot of that extra tonnage itself, utilising 165,000 tonnes in 2018, INSG data showed.
That additional metal processing is also leading to higher output of stainless steel from Indonesia, exports of which rose sharply in 2018 and are expected to continue climbing.
With metal stocks for delivery on the London and Shanghai exchanges being tight, stockpiling by Chinese NPI producers could underpin market sentiment for the coming months, but "time is limited," said Xu Aidong, Antaike's chief nickel analyst. SNI-TOTAL-W, MNISTX-TOTAL
The extent of any enduring supply shortage depends on how quickly other ore exporters crank up output and shipments in response to the elevated prices.
Philippine nickel miners are expected to boost ore production next year, but may still not be able to fill up the supply gap.
"There's a decent chance that... the Philippines ramp up a little bit more but not huge amount. We're talking maybe 50,000 tonnes," said BMO's commodities research director Colin Hamilton.
Analysts said the Philippines faced the challenge of the approaching rainy season, stricter emissions controls coming into effect, and limited new mine capacity.
Other ore producers in Australia, Canada, Russia and New Caledonia are also expected to attempt to raise output, but face similar constraints.
"Ore from Indonesia could not be readily be replaced from Philippines or any other ore exporting country, and the only possible outcome is a decline in NPI production in China," said Wood Mackenzie's Zhang.
Primary nickel production by top producershttps://tmsnrt.rs/2kb7ioY
Nickel mine and primary metal production by top producershttps://tmsnrt.rs/2kc4OXq
Global nickel prices surge on Indonesian ore export ban, tight exchange stockshttps://tmsnrt.rs/2k8C5CN
(Reporting by Mai Nguyen; Additional reporting by Tom Daly in BEIJING; editing by Christian Schmollinger)
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