Global markets set the tone

Who would have thought? Nickel continues its rise on the London Metal Exchange (LME) and, according to analysts at Reuters, is so far the top performer amongst metals in 2019 with a price increase of more than 20%. Since the end of December 2018, in a sound and constant upwards movement, nickel could reach levels of USD 13,000.00/mt and more. However, from a chart technical point of view the rise happened too quickly, so that indicators, such as the Relative Strength Index (RSI), pointed to nickel moving into an overbought region. So it was no surprise, and actually welcoming for the continuation of a “healthy” price development, that after reaching and breaking the psychological level, there was consolidation, which led nickel to levels around USD 12,500.00/mt. On the 11th February 2019, the 3 months LME Future price was between USD 12,500.00/mt and USD 12,730.00/mt.

But also, when looking at nickel against other asset classes, such as stocks, bonds and alternative investments, this alloy and battery metal has no reason to fear any comparison. The present rise has also little to do with the hype or speculation of electro mobility seen in the first half of 2018. In the same time frame, the other important battery metal, cobalt, has taken some severe losses. Originally, cobalt had almost quadrupled in price in a 16 month rally, going from roughly USD 26,500.00/mt to about USD 97,000.00/mt. There had been the fear that the instable and inacceptable political situation in the “Democratic” Republic of Congo could lead to sustained shortages in supply, but this has not proven to be the case. Such a rise was neither sustainable nor valid.

After first signs of decline, there was a veritable collapse in price. The background to this lies especially in the fact that mines in the “Democratic” Republic of Congo and the processing plants in China and India had led to a supply surplus in this basically rare metal. Even with the most positive development in demand from the field of electro mobility, the output could not be absorbed. And it could not have played a big part that in batteries of a newer generation, cobalt will increasingly be substituted by nickel, as at the moment, cobalt is still a necessity. It is more likely that too many, apparently, wanted to profit from the price boom. At the moment, cobalt with a purity of 99.3% is trading at USD 44,000.00/mt in Europe, more than 50% down from the high of April 2018.

Perhaps, a very simple and obvious explanation for the robustness of nickel prices since the start of the year should be sought. It is, probably, really tied in with the fundamental demand for nickel since, regardless of any economic weaknesses, it is needed for stainless steel and battery production. Additionally, availability of scrap is low, stainless steel production worldwide has grown strongly in previous years, and also, new steel works in China and Indonesia need additional raw materials for production. For this reason stainless steel scrap, for some time now, has been seeking new routes, also outside of Europe. It is not just with nickel that global markets set the tone, also with scrap.

Regional price differences are broken down in a functioning market thanks to the numerous economic and ecological advantages of scrap, which also brings social benefits (see below). A comparatively high freight cost efficiency of the commodity through arbitrage helps too. According to the investment and commodity bank, Macquarie, nickel once again continues to have the biggest supply deficit, in the previous quarter and since the start of the year and this is even with a significantly increased nickel pig-iron production in China and Indonesia, and a reduced stainless steel production, for cyclical and speculative reasons. Strong high prices could, however, lead to a re-stocking and eventually to increased orders which could present stainless steel producers with some challenges in raw materials.

Aside from this, in today’s world of low interest rates, it is more and more difficult to profit from financial investments. The stock markets have already fallen sharply after some mixed views in the prognosis for world economies in 2019. It is not even yet certain if the correction is now finished. In view of a possible slowing of growth, the Federal Reserve Bank is becoming more cautious about raising key interest rates. No need to even mention the European Central Bank (ECB) in this context. Rumours are that the Fed could increase rates once more in the course of this year, and then perhaps renew the cycle of lower interest rates. Here, the ECB has its hands tied since interest rates are already at zero, or even lower.

Professional asset managers, and those who would like to be, are, therefore, seeking out lucrative alternatives. As long as the economic environment does not worsen – a true recession cannot be spoken of yet – and investors do not develop a general aversion to risk, then commodities would once more, after quite some time, become an investor’s focus of attention. Whilst investment funds had severely run down their long positions in the second half of 2018, a decisive factor in the price fall, LME data suggests that they are now, to a large extent, behind the present positive price development.

But it is not that funds are only investing strongly in nickel because of a lack of alternatives. Fund managers are making purchasing decisions based especially on the specific supply and demand situation in nickel, as well as on the expectations of future development. In Germany, the “technical recession” of the second half of 2018 should be seen as an exception since this was caused by special factors such as a new registration procedure which has automatically reduced car sales. Since the start of the new year, car sales have been catching up and should recover.

Despite being printed even in commodity publications, the turnaround in nickel has certainly not had anything to do with the tragic mining disaster in an iron ore mine owned by Vale in Brazil. Long before the accident, there had already been a turning point in the nickel price development. But even nickel does have its limits where growth is concerned. Higher prices could mean that additional nickel pig iron, not in use at the moment, could be re-activated so that a “natural” limit on the upside appears once a certain price level has been reached.

In a press release in the middle of January, the LME announced the launch of seven new futures contracts which will have a cash settlement rather than physical delivery. In more detail, there will be three new products for the aluminium market to improve pricing dynamics: two contracts for aluminium premiums in Europe and the USA, and an Alumina future, which aims to reflect the price dynamics of the physical alumina market more precisely. There will also be two new contracts available for HRC steel in North America and China. Additionally, the LME will also launch for the niche futures, cobalt and molybdenum, cash settled contracts, presumably to increase the otherwise poor liquidity of these two contracts. Finally, the LME announced that in the fourth quarter, a futures contract for lithium will become part of its product range.

The “Handelsblatt” publication reported on the green transformation of ThyssenKrupp. Accordingly, ThyssenKrupp wants to invest ten billion Euro in CO2 free steel products until 2050. Steel production should be converted to one which is hydrogen based. In “Handelsblatt” ThyssenKrupp Steel CEO, Andreas Goss, described this step as part of the “duty of industry to make a contribution to climate protection”. German steel is at the moment, with emissions of almost 32,000 kilo tons, one of the main emitters of CO2 in Germany. This is almost a third of all emissions of German industry. This commitment shows that the vision of the steel branch is to aim for a green steel in the next twenty years.

Until then there is still a way to go, but unfortunately, and for incomprehensible reasons, the article did not highlight the huge importance scrap plays in reducing greenhouse gases. Already today, the German and European stainless steel industry, by its considerable usage of scrap makes an important contribution in reducing CO2 levels in German and European economies. Unfortunately, as this article shows, this is obviously under the radar of media, politics and the public. A higher scrap quota would reduce emissions of environmentally harmful greenhouse gases even further. With legislation, it would be possible to pave the way to green steel and stainless steel even more quickly. For example, it there would be an EU emission scheme whereby the usage of scrap would be rewarded, then scrap quotas in production would be increased.

As well as emissions, which have a long term effect on climate change, the ecological, economic and social effects of an intelligent and increased use of scrap in the short and medium term should not be forgotten. Unfortunately just a few weeks ago, the collapse of a dam at a Brazilian iron ore mine reminded the public that mining and production of primary raw materials are not without consequence for man or nature. A mud slide tragically killed 300 people. Already for some time, people in the area had been struggling with contaminated water. The red mud is an unfortunate consequence of ore mining, since even the purest ore still contains many impurities. In mining the material, rocks are ground and, when washed by water, the iron ore is separated from the rest. These types of mines, therefore, are usually surrounded by lots of retention reservoirs which fill with mud collected from the red silt.

In November 2015, the culprit of this fatal disaster, the Brazilian mining company, Vale, in a joint venture with BHP Billiton, had already had a dam break releasing a mud slide killing 19 people. At the time, experts estimated that it would need about 100 years for the soil to be free from contamination. Both parties of the joint venture agreed to pay a compensation sum of around 5 billion Euro. This did not have long-term effects on Vale’s performance on the stock market. Within three years, Vale had reduced its net debt, increased its operating return and so raised its market capitalisation by more than 500 percent. That is until that day in January 2019 when the share price dropped by 25 percent. And in view of the continuing focus today of politicians and society on sustainability, commodity companies, banks and financial markets can no longer avoid long-overdue discussions. The headline in the Financial Times “Brazilian disaster poses test for mining industry” puts the topic of sustainability once more into the public and investor eye.

Commodity markets also reacted to the disaster since Vale is regarded as the biggest iron ore producer worldwide. Because of possible shortages, Vale declared force majeure on some of its contracts as it no longer saw itself in a position to fulfil all of its production commitments on time. A drop in iron ore production of about 70 million tons is threatened for 2019. Within a short space of time, the supply shortage has led to iron ore prices rising on commodity markets by around $76 to $92 per ton. Some analysts already believe levels of $100 per ton are realistic.