Old Wise (White) Men

Nickel: from underperformer to outperformer again?
Nickel quotations at the London Metal Exchange (LME) have recovered comparatively well – prices have risen by around 16% and, alongside tin and copper, nickel has been one of the “best” performers of the year so far. At the end of April the 3 months price for the nickel future was quoted at USD 19,330.00/mt, the highest rate since September 2023. At the moment the metal is being traded a little lighter in London around USD 18,650.00/mt, which is also due to the uncertainties and disparities in view of the fight against inflation and possible interest rate cuts in the USA and Europe. Interest rate cuts in 2024 have recently been discussed more cautiously by the American Federal Reserve, whereby renewed increases have been explicitly ruled out. Listening to those returning to Europe from holidays in the USA, it seems “greed inflation” has taken hold in the USA, where pool usage fees have been introduced and charged even in luxury accommodations.

On the one hand, nickel has been supported by the generally improved economic outlook (also for the manufacturing industry), and on the other hand by various news items pointing to (possible) shortages, even if short-term in nature. Related news in the recent past which have moved the sentiment in the market, were rumours that China could possibly increase its strategic nickel reserves with nickel pig iron. Further, there are renewed reports about the significant lengthy time taken to award mining licences (called RKAB) to mine operators in Indonesia. News about the slow process had already caused price jumps in February (see also the March 2024 Oryx Commodity News). In contrast to this, the nickel market was surprisingly calm about further sanctions, announced mid-April by the USA and Great Britain, against Russian metal supplies (see further below).

Of course, the Exchange trades the future, and therefore expectations in regard to fundamental data should also be discussed at this point. The annual outlook published at the end of April by the International Nickel Study Group (INSG) provides answers. And this sees 2024 as the third year in a row with a surplus. Production is expected to grow by about 5.9% to 3.55 million tonnes nickel, after production in 2023 rose by almost 10%. INSG sees demand in 2024 growing by 7.9% to 3.45 million tonnes. This is somewhat stronger than in 2023 when it increased by 7.7%. The latter figure, it has to be noted, was already corrected on the upside in this publication.

Despite the upward revised demand, there still remains an expected significant surplus of around 110,000 tonnes for 2024, after – corrected – 163,000 tonnes in 2023 and 98,000 tonnes in 2022. Caution should, therefore, be exercised in the expectance of price increases caused by shortages. And also finally, there is again more exchange deliverable material in the market, which can be seen by the increase in warehouse stocks of the LME and also of the Shanghai Futures Exchange (SHFE) that have risen since mid 2023; LME warehouse stocks have doubled in this timeframe. Therefore, the result of the Reuters survey, taken at the end of April is not a surprise: The leading analysts surveyed see the average nickel price (cash) for 2024 at around USD 17,310.00/mt.

Further sanctions against Russian metals
In mid April the British and American governments announced they would intensify their existing sanctions against the Russian metal sector. In December 2023 the G7 States had already announced the intention of further restricting Russia’s revenue from this sector. Metals such as oil and gas are one of the most important Russian export goods and therefore an income source for the Kremlin. The new sanctions see an import ban on Russian produced aluminium, copper and nickel in the USA, and also restrictions on trading these metals on the Chicago Mercantile Exchange (CME) and the London Metal Exchange (LME). The deadline was the 13th April: Russian material produced on or after this date can no longer be traded. Material which is already in an LME warehouse can, on the other hand, still be traded and moved without restrictions. In the rules layed down by the LME this material is referred to as “Type 1 Russian Warrants”. Material which was produced after the 13th and brought to the Exchange is named as “Type 2 Russian Warrants”, for which trade restrictions apply and the commodity is then becoming “immovable”, so to speak.

At the end of March around 310,000 tonnes aluminium, 61,000 tonnes copper and 25,000 tonnes nickel were in the LME warehouses. The share in aluminium of Russian origin accounted for more than 90% of the total amount of the warehouse stocks, whereby nickel had just a 36% share. Shortly after the announcement of the sanctions and the new LME rules, metal traders immediately tried to take advantage of this new situation, as befits good capitalists. Type 1 goods could be taken “off-warrant” and reintroduced to the Exchange as Type 2 goods, and then a share of the warehouse rent could be agreed with the operator for this physical material – according to the applicable rules. The LME, as soon as it became aware of this, immediately adjusted and expanded its rules regarding storage, as described below.

LME introduces new rules amidst rising tensions on the nickel market
As mentioned above, the LME has introduced new rules to take action against manipulative practices on the metal market, especially in regard to Russian aluminium. These measures are a reaction to the sophisticated trading strategy of some leading companies, which have taken advantage of the split between Type 1 and Type 2 metals, due to the sanctions, in order to secure considerable profits through stock sharing agreements and who have, therefore, contributed to market volatility. The new rules also apply to copper and nickel.

The regulatory adjustments reflect the pro-active approach by the LME to maintain fair trade practices and market stability amidst developing geopolitical tensions and economic sanctions. As these rules come into effect, the market is expected to be more transparent and less volatile, which is another step towards restoring full market confidence after the crisis of March 2022. The regulations also intensify control of the “rent-share” business practice which could be prohibited if it hinders market access or manipulates pricing.

After these events, Norilsk Nickel and its chief executive, Vladimir Potanin, announced that they expect increased market disruptions and a 15% drop in income since 2022 on account of the sanctions. While all this has been happening, Nickel Industries Ltd through its connection to Tsingshan Holding Group, the biggest stainless steel producer worldwide, has risen to the sixth biggest nickel producer globally. This partnership has enabled Tsingshan to have access to the Western capital markets and to invest in the extensive operations in Indonesia which have been of vital importance for the growth of Nickel Industries Ltd in the last ten years.

Old wise (white) men
Yes, in Europe there are still intellectual politicians with experience and solid footing. However, nowadays, especially in the USA and Europe (for understandable reasons) it is no longer in vogue to listen to these people derogatively described as old white men. Yet now and again, it can sometimes be refreshing and inspiring to listen to these walking “data bases” and draw conclusions from them in combination with other facts and information. This author had the pleasure of this in April at the Commodities Forum of Mitsui Bussan Commodities France (MBCF) in Paris.

MBCF had invited to the Forum Michel Barnier, former French Foreign Minister, former Commission member and later Brexit Chief Negotiator of the EU Parliament, EU Commission and EU Council with Great Britain. During the evening, and spurned on by questions from a host, Mr. Barnier was in a brilliant mood and bubbling over with a need to communicate, not unusual for a politician. But it was not the usual phrases he was imparting, but more thoughtful statements and observations which should be shared here. It will certainly have played a part in the sometimes unsparing openness that the offices he held are now confined to history and no great consideration had to be made to any party politics and other interests.

In connection with protection against climate change, Barnier was convinced that it would not be possible to meet climate goals in Europe without further investment in nuclear energy. This is especially so if Europe were to follow the strategy of a strong industry, which in his opinion would be very sensible. Too much service industry, as seen in many countries, does not create much resilience, rather more diversification would ensure a balance between sectors in times of crisis. In this context, it is necessary to be less naive in future trading relations, even when this concerns energy supply.

Decarbonisation and ideology of “de-growth” could also not be enforced upon industrial companies and farmers in the EU. Rather, these two sectors and decarbonisation have to become intertwined. The nuclear phase-out in Germany was unfortunately a decision with a very short-sighted focus, while the energy policy in France has always been very long term orientated from the 1950s. It is not difficult to recognise which energy mix Barnier prefers for the future to reconcile industrial interests for cheap electricity and the unconditional protection of environment and climate.

With regard to the European Union, of which he is a great advocate, he pointed out that the special feature of this structure of states is indeed that of being united without being uniform. The continuing existence of national identity and autonomy of the EU member states is a very important element, and the nation states will not be dissolved. The EU draws its political importance and power from a common market with 450 million consumers and more than 23 million companies (outside of the financial sector). Even if it may not always appear so, these are numbers which are also still of interest to an American or Chinese President and, therefore, a powerful argument in achieving political goals.

Furthermore, in his opinion, despite all shortcomings and potential to improve, the EU remains a zone of stability which has so far been able to, or will be able to, overcome immense and in the main exogenous challenges, such as the financial and sovereign debt crisis, migration, Covid-19 and the war in the Ukraine more or less successfully. In this sense however, Brexit is a political failure, especially on the part of the EU, because people at grassroots levels were not listened to enough. In addition, national politicians had all too often pointed a finger at the EU as the root of all problems instead of at themselves. For example, Nigel Farage, British politician, former EU parliamentarian and energetic figurehead of Brexit had made the prediction that after Brexit, the EU would cease to exist.

Since the Brexit referendum in June 2016, however, the EU still exists today and there are even numerous new candidates applying for membership, despite all the prophecies of doom. In the end, the populations of countries will always prevail anyway, but it may often be a very, very long road. This is why, using all his power, the Russian President Putin also wants to spoil the attractiveness of the EU’s democratic model, and especially so since ten new countries joined the EU in 2004, having been under the umbrella of the Soviet Union, three of which were even provinces of Russia.

And in any case, the EU would of course have the right to do so and also the ability to control and defend its borders, whereby freedom of movement within the EU as an essential component would not, and should not, be negotiable. This statement was probably directed at a statement made by the former German Chancellor at the height of the refugee crisis in 2015. However, migration was also always cited as a reason for Brexit and now, after Brexit, migration in Great Britain is at a new record level. Last but not least, and among many other things, he asserted that in the future, the EU might not just be a common market, but also a defence union beyond NATO, with its own defence strategy and the ability to defend itself.

“Science Fiction” or how much scrap will exist in 26 years?
Europe’s vision is to be completely climate neutral by 2050 at the latest. On the way to achieve this, the European Climate Law sets a first interim goal for 2030 : the reduction of greenhouse gases by 55% compared to the base year of 1990. In February 2024 the Commission announced a further interim goal for 2040: the reduction of greenhouse gases by 90% compared to the base year of 1990. There is still a quarter of a century to go before 2050, but it is good and correct to set target levels and prepare the regulatory groundwork ready for the long term.

Science also usually comes into play when long term questions are involved. In this context researchers of the Ernst Abbe University in Jena have raised the question: how much scrap will there be in Europe by 2050? (Source: Jena contributions to economic research). Based on a systematic literary analysis involving experts from industry and the World Steel Association, researchers have arrived at a long term estimate. For 2030 the post-consumer – or “old” – steel scrap amount is estimated to be between 80 and 105 million tonnes; for the year 2050 this range increases to between 100 and 125 million tonnes. The growth over a long term period (2010-2050) is on average 1.6% per annum.

Furthermore, the researchers introduced their own parameter as a description: the potentially available domestic amount of post-consumer scrap. This indicates a theoretical maximum value. To put this another way, there could be up to 125 million tonnes steel scrap available from the circular economy in 2050. Important factors which determine the future volume are sector specific product lifetimes, the quantities of steel already in use and still in use, also referred to by scientists as anthropogenic stocks, and ultimately the recycling rates. These factors also determine whether the volume estimates will be a future reality or just “fiction”.