Ghost train to Port Hedland

The London nickel price could no longer hold out against increasing macroeconomic pressure, and the very firm US dollar also put the industrial metals into more difficulties. On the London Metal Exchange (LME) nickel was not able to successfully hold the support level of USD 12,000.00/mt. Since the beginning of November, Exchange prices have slid to an 11 month’s low of USD 11,400.00/mt, a level where prices are currently trading. Compared to the highs of mid-year, this constitutes a fall of over 25%. After results were announced from the mid-term elections in the USA, which were mixed for both the President and the Democrats, the US-dollar quickly weakened, which slightly supported the dollar quoted metals, but since then the Greenback, at 1,1250 USD/EUR, is trading more firmly than before the elections.

A digression:  The mid-terms have once more shown just how many US-Americans, including the President, Donald Trump, live in their own fantasy world. They bend the truth to suit their own ends. And the subjective truth holds no boundaries. Everyone believes what he or she wants to. Now there should be no restrictions in matters concerning religion. Everyone is free to believe what they want to. But when, for example, numerous supporters of creationism, many of whom being loyal supporters of the President, still believe today that the earth is only about 6,000 years old, then eyes must be rubbed in amazement at this country where everything is “great”.

It’s appropriate to mention here that paintings have just been discovered in a cave in Borneo which have scientifically been judged to be at least 40,000 years old. This, however, does still not give this group any cause to reflect on their own concepts “because it is just that, the earth is only 6,000 years old”. They have not made any thoughts about the logical process in the generation of knowledge by Homo sapiens. So of course all discussion comes to a standstill. Even the catholic church and its followers, seen by many as not being very progressive, have, at some point, come to recognise that the earth is not flat and the world was not created in 7 days. This has not meant though that they have had to give up their religious beliefs.

The slight recovery made by nickel after the mid-term elections did not last long. It did not even help when the commodity giant, Glencore, in a report from the news agency Bloomberg, tried, in vain, to support market sentiment a little for nickel. Glencore is of the opinion that most of the market does not sufficiently realise just how big the demand for alloys and battery materials really is, and it has also not fully understood how high the nickel deficit will be globally. The substantial warehouse reductions, according to Glencore, show that nickel producers would not be in a position to cover present nickel demand. LME nickel warehouse stocks, at 216,612 tons, are at the lowest level since 2013, and have fallen for the fourteenth month in a row.

Nickel stocks on the Shanghai Futures Exchange (SHFE) at the moment are at 14,829 tons. This is 100,000 tons less than even in 2016. However, again according to Glencore, this situation will only become critical when expectations about the growth of battery demand are confirmed. Bloomberg also confirmed that Glencore is not alone in its estimation. Goldman Sachs had also made similar comments in its report in the middle of October. It is, however, of course no secret that the advocacy of such a nickel bull story would serve both Glencore and Goldman Sachs own financial interests pretty well.

But this picture is not fully supported in the report by Metal Bulletin about the Nickel and Cobalt Conference organised by the Chinese Metals Information Provider, Antaike, which took place between 6th and 8th November 2018 in Xiamen, China. And this should raise a few suspicions because, more than anywhere else, the growth expectations of electromobility in China plays an important factor in the nickel story. So when there is not much belief in this here, then outsiders should really pay attention. But China also has its own interests. Perhaps, because of high demand and the political obligations made about electromobility, it wishes to put a damper on any price rises.

In any case, delegates at the conference expect the main demand for nickel in China, in the coming years, to still be from the national stainless steel sector. A continuation in capacity expansion of stainless steel production is also expected. Political factors and development of infrastructure and provinces all play a part here. For 2018 a production of 28 million tons by the Chinese Special Steel Enterprises Association is expected, which is an increase of 8% over the previous year. For 2019, it is expected that growth, due to economic cycles, will fall by 6%. On the basis of 28 million tons, this would still mean an absolute increase of over 2.5 million tons of stainless steel which corresponds to a nickel usage of about 200,000 tons. This cannot be regarded as a meagre amount in the global nickel supply and demand balance sheet.

According to a market researcher from Antaike, even though production of battery materials in China has increased from 2016 to 2017 by 100%, this is still just 100,000 tons in total and in 2018, because of the higher basis, a growth of “only” 30% is expected. There are, however, also aggressive investments in new nickel projects in order to fulfil the needs of both stainless steel and battery sectors. Indonesia and its ores play a central role in these projects. Conference participants, therefore, anticipate the very intensive investment activities could very well dampen any price fantasies in nickel supplies. In the report, this view was also held by a representative of the Nickel Institute. It is also problematic that the Special Steel Enterprises Association reckons with a Chinese stainless steel consumption of only 23 million tons in 2018. Whilst this is an increase of 15% over the previous year, it does leave a surplus of 5 million tons in production. The threat is that this surplus will spill over into other markets to the detriment of the stainless steel producers there.

And, in the meantime, what is happening to stainless steel scrap? During the course of the year the continuing downward trend, especially in the valuation of nickel in scrap, could not be stopped. Price determination for scrap, seen in the true light of day, is, above all, an optimisation process of stainless steel plants. At the same time these are an important parameter in demand and can even shape it to a great extent. The way that plants, at the start of a year, stock up on certain basic requirements of a primary commodity for the long-term serves, in the short-term, as a regulator for stainless steel scrap and other spot purchases of primary commodities.

This makes the following questions relevant: Have production and demand for stainless steel for the individual years been forecasted correctly? How much stainless steel scrap is available at the prices on offer? How does the nickel price develop in the individual years? Altogether certainly not an easy task to find the right answers. Added to this is that statistics about the availability and consumption of scrap are few and far between. The International Stainless Steel Forum (ISSF) could perhaps help out here since it could, relatively easily and reliably, survey its members about their scrap consumption and publish the results.

However, it is clear that, depending on the quality of these assessments, there will be an influence on scrap demand. If a large amount of primary material is contracted at the start of the year, then it is increasingly likely that there would be a relatively lower scrap consumption during the course of the year, thereby leaving excess scrap supply. But then, commodity procurements costs on average would not have been optimal, even if the disparity could be used to put pressure on the scrap price. On balance, it remains suboptimal.

If, however, little primary material has been bought, then there could be a supply shortfall, which would have to be filled, generally speaking, by more expensive spot purchases, and if necessary, secondary commodities. Scrap, in this scenario, if available, would always be the better alternative, but would also necessitate a reasonable valuation. The elasticity of scrap supply is, as the economist says, very price sensitive. An adage for optimising commodity procurement is to purchase as much scrap as possible, in order to avoid more expensive primary material, if it is not technically a necessity to buy.

But how is it safe to plan with regard to a sufficient availability of scrap? With a greater transparency of statistics also including longer term scrap procurement contracts, for example for a quarter, it should be possible to better optimise and stabilise procurement of stainless steel scrap. Scrap is basically a scarce commodity, but at present also considerably cheaper than primary commodities and so, as long as it is available, should always be the first choice.

The LME, according to a report from Reuters, was somewhat relieved with comments from the EU that even after a hard Brexit EU companies should temporarily be allowed to use the clearing houses in Great Britain. This enables the LME to win time in order to obtain necessary permits for its services and transactions after Brexit. The Chief Executive of the LME, Matthew Chamberlain, has expressed his thanks that the EU Commission has acted pragmatically in this exceptional situation. Yet, Chamberlain adds, it is still necessary for the LME to work on emergency plans in case of a hard Brexit until such time as a legally binding document is produced.

The Frankfurter Allgemeine newspaper (FAZ) has run a hair-raising story from the commodity world. In Australia a train fully loaded with ore from the mining company BHP Billiton was making its way from the mine to the harbour in Port Hedland, from where the company ships about 5 million tons of ore every week. Above all to China, where steel companies are now anxious about their commodity supplies. What happened? The train driver of the 240 wagon super train had stopped the train for an inspection of one of the wagons. Stupidly, with the driver absent, the train started in motion and travelled at a good 120 km per hour through the countryside, until, in order to avoid worse, it was deliberately derailed about 120 km before reaching Port Hedland. Thankfully there was no injury or loss of life, but there is now a broken down train with 240 wagons, load and engine, as well as a ruined railway track which have to be repaired as quickly as possible, however time consuming and expensive.