Certainly not the end of days

London nickel prices remain almost an unpredictable candidate even at the start of the New Year. If nickel had recently seemed to be lacking in momentum and only able to move depending on the movements of the US Dollar, then all this changed on the 12th January 2017 with one fundamental piece of news, which could not have been any more fundamental. All along, speculation had been made about this development, and, as can now be seen, quite rightly too. At 10 minutes to 10 in the morning, Reuters reported that the Indonesian government had announced new measures with regard to the mining sector.

This was considerably decisive for nickel in particular, as there had been a strict export ban for unrefined nickel ores since the beginning of 2014. This trade restriction, in an initial euphoria, had at first driven nickel prices upwards, but then in more recent times had importantly provided a more supportive role. After the export ban the Philippines, above all, were able to step in and massively fill the gaps in supply – especially to meet Chinese demand. In general, however, since 2014, the distortions of lower nickel prices seen foremost in China, which had meant that those domestic stainless steel producers had more competitive advantages, has been depleting to the advantage of European producers.

Indonesia went to the media, highlighting the most important changes. Holders of a mining license can apply for a prolongation of an existing license for up to five years, before the existing license has already expired. The export of copper, lead, zinc and iron concentrates will be allowed under certain circumstances. But the export of concentrates will be stopped again if the production of the domestic smelting and refining industry does not develop in line with the goals which have been set out. Furthermore, in the future, at least 51 percent of shares, and by this, therefore, the majority holdings of Indonesian mining companies, must be held by either government, or by state-owned entities or held by domestic private companies.

The accountable mining ministry has, furthermore, recommended to the finance ministry that export tax should not be more than 10%. In addition, the export of nickel and bauxite ores will be allowed under certain conditions. Before this can happen, however, the domestic smelting industry should process at least 30% of the low nickel containing ores which are mined in Indonesia. Even if not all details of the changes to be made have been made known, without doubt this is a relaxation of the strict export ban which had been in place up to now. This could mean that the Chinese nickel pig iron (NPI) production could soon, once more, be supplied by Indonesian ore, and in considerable amounts too.

In the wake of the announcement, the nickel price on the London Metal Exchange (LME) fell, within a matter of minutes, from around USD 10,600.00/mt to below USD 9,700.00/mt, But this shock did not last long, and within a short time, a quick rebound brought prices back to over USD 10,300.00/mt. It is still too early to judge what the medium and long-term consequences of these regulatory adjustments in Indonesia will have on the nickel market. But there is no doubt that this subject will occupy analysts and market participants quite a lot as this new year of 2017 unfolds.

On the other side of the coin, commodity demand remains firm – stainless steel production rose in the first nine months of the year by around 7 percent, according to the figures of the International Stainless Steel Forum (ISSF) – and prospects are looking so good that outside influences can be kept in check. The competitiveness, especially of individual commodities such as NPI, is determined not only by its ore availability, but also importantly by the mining and production facilities of the ore, and its upstream products, which in turn determine production costs. In this context, environmentally things are beginning to move, especially even in China.

It has not just been the closure of plants, raising public awareness, which have become a talking point, but the environmental background in many Emerging Markets is beginning to be felt. According to a report by the news agency Platts, China, for the first time in its history, has imposed an ecological tax on certain parts of industry, including, amongst others, the steel industry. In accordance, on the 25th December, the People’s Congress passed a law which will come into effect on the 1st January 2018. This is to replace the present system whereby the relevant ecological data is sent to the individual local environment office, where it is then checked and an applicable demand for payment is sent to the company in question. In future, tax offices will be responsible for the collection of the duties, leaving the environmental offices to fully concentrate on monitoring and ensuring the compliance of ecological standards.

What is very important about this new law, is that incentives will be rolled out which should encourage companies to improve on the defined standards. If emissions are 30% lower than the legal limits, then the emissions tax will be cut by 25%, with a 50% lower emission level, then the tax amount to be paid will be halved. It is certainly expected that investments in environmental protection in China will be increased in the relevant industries. And this is not without good reason considering the levels of pollution at the moment. As well as air pollution, the new law also includes regulations concerning pollution in water, commercial waste and noise. The Central Government, in passing this law, also wants to document its ability to act in matters concerning the environment.

This does at least improve the chance that competitive conditions become more equal again, and that, internationally, there is a competition which is more fair than before. Comments made by the German Economic Minister, Sigmar Gabriel, are appropriate here. Concerned for workers in the European steel industry. he pleads for a level playing field. Necessary are also emissions deals, which would pursue demanding environmental goals. The key industry of steel production should, however, not have to fear for its own existence. To survive, the branch, according to Gabriel, needs fair international competition. But Chinese State leaders hardly heard the pleas here of the German Minister, but in the medium and long term the economic and ecological necessities will move the government, and it already started.

Whilst the nickel price has come under a little pressure, as previously mentioned, with the announcement of a softening of the ore export ban, the South African reference price for ferro-chrome has increased, from the 4th quarter of 2016 to the 1st Quarter of 2017, by around 50% (no typing mistake), from USD 1.10/lb to USD 1.65/lb. This was announced at the end of December by the chrome producer Glencore Merafe Chrome Ventures. In the 2nd quarter of 2016 the price had even been at USD 0.82/lb. Once again, it can be seen how little correlation there usually is in the movement of prices within a portfolio of stainless steel commodities.

Driving forces behind this development, according to media reports, are the lower Chinese chrome ore stocks and a robust production. Even with chrome, China has to be involved, as it represents more than 50% of global stainless steel production. But at this present level, the risk of a possible correction has also risen, so further developments will have to be keenly watched. On the other hand, even though prices of USD 0.82/lb and lower seem to belong firmly in the past, they were a result of the general weak sentiment in all commodities at the time. This sentiment, in recent times, has improved considerably and could even be said to have normalised, being long overdue.

Even if this author is not one of those who thinks that the phenomena of Trump and Brexit mean the end of days, there has been a type of strange vacuum pertaining to worldwide investment in recent times. Both the Presidency and the negotiations to be made by Great Britain in its attempts to leave the EU, are events which have not quite been put into place and which are still yet to happen. Whereas, with regard to Brexit, almost everything still remains pretty much unclear, and any implementation is still far in the future, the program and future actions of the US President Elect do not leave us exactly full of any certainties either. Economic data and share prices have hardly reflected, however, the economic doubts which to a large extent are quite split.

Quite the opposite really, as expectations and prices seem to almost fully cover up any potential negative developments and decisions. It is not just our English neighbours who are showing an almost joyful ignorance or a “now more than ever” attitude, which seems to lack all reason. A warning must be made about this. For, neither Donald Trump nor Brexit are part of a request programme where there are only economically positive consequences, and the negatives, which had been forecast, just do not seem to materialise. Such cherry picking will not happen, neither in the USA not in Great Britain. Even the laws of probability speak against this.