Nickel defies weaker data from China. Weakness could challenge government action. The ghost of inflation prompts speculation but not concern. ECB view is not alone.

Indonesia is clearly in pole position. Production and capacities know only one direction. China is losing with NPI. There, looks to the heavens are being made. Nickel demand is also growing.

Russia ready to make adjustments for tariff rules for raw materials. Left pocket, right pocket. Steel scrap clearly in focus. LME ring open again. For how much longer, is perhaps the question?

LME sustainability register starts. Aluminium is the first. Data voluntary for now. It is the beginning of a journey. Baosteel wants to become greenhouse gas neutral. Scrap is an important key.

China’s economy stutters, nickel unimpressed
Despite generally weaker economic data, weaker stock markets and increasing fears that central banks may tighten the reins on ultra-loose monetary policy in the long term, nickel on the London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE) continues its upward trend undeterred. At prices of around USD 20,500.00/mt and more, a new high in the past seven years was recorded on the LME before prices made a correction, and nickel is now trading around USD 20,000.00/mt. On the SHFE, nickel even reached an all-time high, although this is also related to the fact that the nickel future on the Chinese exchange was only introduced in March 2015. Nickel has been traded on the LME since 1979.

The strength of nickel is mainly due to a good demand and low stocks on the exchange. But it should be made aware that stocks on the exchange are only the visible reserve quantities. Certainly, chart technical buy signals played a role in the recent price rises, as did an increasing added mix of industrial metals for inflation protection. Inflationary tendencies in commodities, depending on the commodity, can certainly be seen in 2021. In terms of the economy as a whole, the question is how sustainable these effects will be in terms of the general price development for companies and households.

The ghost of inflation has not yet brought fear
At present, it is (still) the prevailing opinion of central banks and economists that the rise in inflation is a temporary phenomenon. However, as the Morning Briefing of ThePioneer writes, Bundesbank President Weidmann expects an inflation rate of 5 percent for Germany by the end of the year. In his view, the upside risks clearly prevail. However, the European Central Bank (ECB) especially is convinced that the disappearance of the so-called base effects will lead to a mechanical decline in inflation in the coming year. In plain language, this means that once prices have peaked and there are no further price increases, the changes in the coming year will be put into mathematical proportion to an already higher price level, which will make the percentage rate be correspondingly lower than with a lower base.

And the ECB naturally has an interest in this argument. After all, it has become a major financier of Europe’s sovereign debt, and so gone from being a guardian of price stability to being a weighty economic player. But Morning Briefing warns that actual inflation developments may not keep to this (sometimes opportunistic) forecast. This is because all projections should take into account the following four price drivers: climate protection and the resulting inevitable rise in the price of CO2 will ensure continued inflation. Rising minimum wages will also play a role in the future. Demographics in Germany will also make labour more expensive. Fewer and fewer people in employment and more and more pensioners are making labour more expensive.

And finally, China could also have an influence on inflation in Germany via import prices. There, too, demography and the one-child policy could make labour and, therefore, products and services more expensive. And, the longer the high inflation rates persist, then the more there is a need for the wage-price spiral to come into line. The current high prices lead to lower purchasing power for households and companies, just as price indexations of rents, which are linked to these inflation rates, lead to further dwindling purchasing power, so that after some time there are hardly any arguments against a compensation of purchasing power via a corresponding wage increase. This, however, in turn leads to rising prices for products and services. It is essential to keep an eye on this development, as a significant rise in interest rates could also be a consequence. It would be healthier for the national economies, but perhaps not necessarily more comfortable. It is easier to live at the expense of savers and future generations.

With nickel, Indonesia sprints away from everybody else
The Australian investment and commodity bank Macquarie has concerned itself with the current supply and demand balance in the physical nickel market. Contrary to its own expectations, in 2021 the market has moved into a large supply deficit or, respectively, a demand surplus. The high demand for nickel has therefore led to a warehouse stock depletion of over 150,000 tons (LME, SHFE and producers) to date. According to Macquarie’s calculations, the market still had a surplus of 100,000 tons in 2020, but a deficit of 125,000 tons of nickel is expected for the year 2021 as a whole.

For 2022, however, a surplus is expected again, as production capacities and actual output in Indonesia continue to show a steep upward trend. Even in 2021, growth of around 300,000 mt is expected, which is more than the equally significantly increased consumption in stainless steel production. In parallel, however, nickel pig iron (NPI) and ferronickel production in China has declined by an expected 85 thousand tons, with a further 40 thousand tons of supply losses in other areas outside of Indonesia and China. With NPI capacity in Indonesia rising from 1.26 million tons annually this year to an estimated 2.3 million tons per year in 2025, giddy heights are being reached. Full capacity utilisation is not likely to happen initially.

However, the future raw material quantities will also be needed in the long term, because in addition to the demand from stainless steel production, which has been growing at a 5-6% per year pace since the 1960s, battery production for electro mobility is increasing. In the 2000’s, there were considerable shortages of nickel because the economy of China had grown at a significantly above average fast rate with a corresponding demand for raw materials. At that time, nickel supply was not prepared for the high demand and, with the exception of stainless steel scrap, was also not flexible in the short to medium term. Nickel prices of up to USD 50,000.00/mt and more were the result. However, such levels do not seem to be “a threat” in the current outlook.

The dominance of Indonesia in nickel production (about 50% global market share) is not really surprising due to the high profitability of enterprises. According to Macquarie, unimaginably fast amortisations on plant investments within two years do not seem to be totally absurd. As a result, there are hardly any new capacities outside Indonesia. The only project at present is supposed to be a 10,000 annual ton operation in Cyprus.

However, the authors at the bank also quite rightly point out that, besides calculation and general dependence, there are still other reasons, such as geopolitical and environmental risks, which may not make it necessarily advisable to “put all your eggs in the Indonesian basket”. Apart from stainless steel scrap, however, there are hardly any alternatives at present. And the environmental risks are high. After all, each ton of NPI creates a footprint of 55-65 tons of carbon dioxide. In contrast, the use of one ton of stainless steel scrap saves around 4.5 tons.

Except for scrap, no more tariffs in 2022
S&P Global Platts reports that the export duties on iron and steel products as well as industrial metals, imposed by Russia from August to December 2021, will not be extended into 2022, if the words of Deputy Industry and Trade Minister Evtukhov are to be believed. The goal of dampening commodity prices to protect the domestic economy and industry has been achieved and the 15% export duty is therefore no longer necessary.

However, the situation seems to be different for steel scrap. Both domestic and export demand appear to have been very robust. At the end of July, the export duty on steel scrap was raised from the previous 45 EUR/mt to 70 EUR/mt or 5% (whichever is the greater). Even if it is not currently planned, the minister did not rule out a temporary export ban on scrap.

This fact shows that interest from Russia’s steel producers in the sustainable and environmentally friendly raw material steel scrap is strong. This interest could even further increase if the European Union also includes the emissions of the raw materials used for domestic steel production as well as steel imports in the EU Emission Trading System.

President Putin’s statements have also given a further boost to industry voices that assume that, in return for the elimination of export duties on industrial metals from January 2022, the tax on the mining of ores should be significantly increased. However, this is probably not so much about ecological directional impact but more about the fiscal filling of budget holes. According to market participants, the level of the ore tax should be at least in relation to the level of the respective ore prices.

The iconic LME ring is open again, but its days may be numbered
A few days ago, after an absence of 18 months, traders were allowed to take their places again on the red sofas of the LME. Our recent newsletters have already reported extensively on the uncertain future of the ring, so rich in tradition. With the reopening of the ring, it now seems as if the brokers can enjoy a little interim success. Nevertheless, the question remains about whether floor trading will return to the volumes seen before the corona crisis. The signs of the times point to a permanent closure.

At the beginning of this month, in a meeting with LME CEO Matthew Chamberlain, he spoke about the difficult discussions with various interest groups with regard to the future of the ring. CEO Chamberlain himself regularly affirms the benefits of online trading. In addition, numerous market experts have expressed their doubts as to whether the ring is going with the times. Furthermore, there is currently no asset class that is as volatile as commodities. Risk management is much easier on the monitor than with a contact person in the ring.

Various newspapers also reported on the return of traders to the ring. In private, some brokers have reported their doubts about the trading volume being anywhere near what it was before the corona crisis. At least one trader reported that, to be on the safe side, he was still leaving the price tags on his new suits and had not yet ordered an annual pass for the Tube. If trading volumes do not reach a critical level, it will be economically difficult to justify a team for the ring.

LME publishes sustainability register for metals
The LME announced a fortnight ago that from October 2021, it will publish an electronic sustainability register for metals. The register operates under the name LMEpassport and will in future replace the previously paper-based analysis certificates and specification and quality assurance documents.

These documents, until now, had to be added to each delivery to and from an LME warehouse. What is new is that, in future, voluntary information on the sustainability properties of the metals will also be provided. By taking this approach, the LME not only expects a higher process of automation in its own warehouses, but also greater transparency for market participants. Initially, the sustainability register will be available for the metal aluminium.

Chinese steel giant: focus on climate neutrality
Also in The Land of the Rising Sun, thoughts are being made about how to achieve climate neutrality. Some time ago, Xu Wanren, the chief economist of Baosteel, the second largest iron and steel company in China and the fifth largest in the world, reported that the development of new technologies for steel production is fundamental to achieve CO2 neutrality.

With the development of the direct reduction process, iron ore is reduced to sponge iron using natural gas, which can then be further processed in the electric arc furnace. This reduces CO2 emissions by 35-40% compared to conventional production and if natural gas is replaced with hydrogen, a reduction of 70-80% can even be achieved. However, the savings can only be achieved if green energy and scrap are available in sufficient quantities, says Wanren.

LME (London Metal Exchange)

LME Official Close (3 month)
September 15, 2021
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
LME stocks in mt
  August 18, 2021 September 15, 2021 Delta in mt Delta in %
Nickel (Ni) 199,110 174,282 – 24,828 – 12.47
Copper (Cu) 245,125 234,000 – 11,125 – 4.54
Aluminium (Al) 1,315,125 1,299,900 – 15,225 – 1.16

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