Nickel on the rise. Breakout from steady levels around USD 16.000.00/mt. Temporary market distortions with previous correction probable. Volatility recently increased.

Inflation rate in USA at 4.2%. The ghost of inflation is back again. Tangible assets and gold benefit. Analysts expect base effect. Higher interest rates not out of the question. Speculative bubbles threaten disaster.

Project of thyssenkrupp and TSR should increase scrap use in blast furnace. The key for use in a blast furnace is in the processing. Optimised coexistence of procedures is the goal in sight.

SHFE introduces ferrochrome futures. So far only under discussion on the LME. Chinese state television wants to motivate small and medium-sized companies to hedge commodity prices. Against the gambling nature?

Nickel heading north once more
After the correction in nickel prices, which was also explained by an easing in the supply of battery nickel – through the related announcements of the producer Tsingshan – large parts of March and April saw a plateau forming at USD 16,000.00/mt. Since the end of April, however, a forward movement again set in, or perhaps it would be more appropriate to say that an upwards gear was engaged. This fact supports the view, expressed here, that a temporary market distortion caused by sudden soaring deliveries of nickel to LME warehouses was responsible for the massive fall. Now, on the back of a very robust steel economy, the alloy metal has once more reached a level of USD 18,000.00/mt, albeit with increasing volatility. The first time this level was reached, it was followed by a correction down to just above USD 17,000.00/mt, before the USD 18,000.00/mt mark was reached again and then confirmed. The base metal was most recently trading at USD 17,700.00/mt.

Inflation could spur on commodities
The strong increase in the US inflation rate to 4.2% in April and a definite rise in Europe have made it again more than clear that the ghost of inflation, despite a long period of low inflation rates, has not been vanquished. As it looks now, the rise of commodity prices is the cause of the inflation, which observers currently expect to be of a temporary nature. When prices stabilise there should be a base effect normalisation again.

However, analysts do point out that the real interest rates are clearly in the negative because of the high inflation rate and the negative to zero interest rates and generally low interest, meaning it cannot be certain, for example, how long the US Fed can keep to its extreme lose money policy. Basically, inflation fears push investors into real estate, gold and, more recently, cyber currencies. It is about fungible investments which at least keep their value. In this respect, the climbing inflation caused by commodity prices could now ensure more demand for commodities through a self-enforcing effect.

If price increases previously had mainly been caused by higher demand and delivery shortages, due to Covid-19 causing temporary production reductions or shutdowns, then now even more investor circles could become aware of the commodities as a safeguard against inflation. This influence can probably already be seen with copper and aluminium and their respective top prices.

Whether nickel will also profit from this has yet to be seen, since this base metal has less market liquidity (cf. also the correction at the end of February). This then raises the question whether the corresponding nickel futures could really serve as an inflation hedge/safeguard for a wider circle of investors. If the respective investment asset is connected more to the industrial economy, then an increasing inflation, as a result of climbing (base) interest rates, could have a negative influence on prices. Normally, higher interest rates restrict economic activity.

More scrap in blast furnace process
As announced by thyssenkrupp Steel Europe and the steel scrap recycler TSR, they are cooperating on a project to increase the proportion of steel scrap used in the blast furnace (in the Duisburg works of thyssenkrupp). Thyssenkrupp hopes with this to reduce the carbon emissions of its steel mill. One can only be pleased about this announcement and wish the project participants much success. After more than a decade, those steel mill operators in Germany, who, historically, have predominantly been on the blast furnace route, have finally recognised how important steel scrap is as a commodity and this raw material can be loudly and clearly talked about.

At present, and for the future, it makes no sense at all to stay silent, as has long been the practice in the past, concealing the technically given quantitative limitation in regard to the sustainable use of steel scrap as a raw material in blast furnaces. Rather, as this project shows, also in a very positive public light, the focus should be on the maximisation of scrap usage under the given framework conditions. And this should be talked about at the German Steel Association. What has not been done in the last decade, with relevant studies and working papers, to put steel production in Germany into a greener light.

Communications were not always clear
First, with the help of the ever-present McKinsey management consultants, the amount of carbon emissions which could be saved with environmentally friendly products, such as wind turbines, produced from steel, was calculated and published. The emissions saved by the applications were then theoretically offset against the existing emissions from steel production. That there was already quite a considerable share of mainly scrap based electric steel production in Germany was not very emphasised at the time in order not to compete with the “more unfavourable” blast furnace route and its companies.

In a further step, a joint study, carried out with the Technical University of Berlin, was able to put steel production, also in particular from blast furnaces, into a more positive light via the so-called multi-recycling approach. The result was the statement that once steel products have been produced, even after the end of their operating life, they are available again as a raw material via relevant closed cycles through steel recycling. This means that the emissions produced at the beginning would be spread over a large number of cycles. Ergo, the emissions of steel production, compared to alternative materials and substances, can be considered as being much lower over the entire life cycle.

As correct and important as this approach is as a facet (steel as a permanent material), it could not really change anything in the perceptions of political decision makers and the public. In this respect, a new and open way of dealing with the facts and the communication involved has finally been chosen now with the blast furnace project. If this had been chosen, ten years ago, already then long overdue, we would be much further on today.

Instead of obscuring facts, it is certainly much more worthy for a blast furnace steel mill to make the best of the given situation, and this means, for example, maximising the use of scrap to its absolute limit. Investments in a steel mill are not cheap and therefore have to amortise over decades. Changes cannot be demanded overnight, even by politicians, without consideration to economic and other consequences. There would also not be enough scrap available to meet all of the world’s demands with the exclusive use of steel scrap as a raw material.

A mixture is still temporarily a blessing
An optimised coexistence of the production process is, therefore, the best way to go, whereby of course, in the long term, and with state financial help, a system change towards a more environmentally friendly process has to be dealt with. And here, a series of errors by part of the steel industry and so inclined politicians, as described above, seem to be moving very one-sidedly in a direction which can certainly be part of the solution, but never really the only solution to the problem: the highly praised hydrogen economy.

On the one hand, there are doubts about the efficiency, as recently expressed, amongst others, by Elon Musk, and on the other hand, considerable investments in facilities and infrastructure are necessary, and then last but not least, there is also not enough “green electricity” in sight in order to produce the hydrogen needed everywhere in an environmentally friendly way. And in all of this, it has been ignored that the iron ores used, in contrast to steel scrap, bring a very considerable ecological backpack with them, which has not been considered sufficiently enough in the emissions trading system of the EU.

Therefore, it depends on the sensible mix of technology and raw materials. And in this environment the electro steel production, run on green electricity based on steel scrap, should of course have a significant place. Not only because of the emissions, but also because of the lower investment costs, this package, according to the author’s expectations, should be far superior to the solutions propagated by the hydrogen economy and its disciples which have a great media impact. A solid, scientific examination to make a multidimensional comparison of the various methods should urgently be made to avoid the huge investment costs in the steel industry ending up in a dead end.

Use in blast furnaces requires higher purity
Now, however, back to the thyssenkrupp and TSR project. Even if the project is of course under a strict seal of secrecy the following can be learned from media articles and publications. A processing plant should focus on the optimisation of secondary raw materials. If steel scrap on the blast furnace route was so far used as a cooling scrap in the converter, that is, downstream of the actual blast furnace, then the possibilities for direct use in the blast furnace are limited. This should change with the new (processing) method and, therefore, make it possible to sustainably increase the recycling quota of steel production in the blast furnace.

The aim is to have a certified raw material with a high purity, which is suitable for use in the blast furnace. Sometimes, in certain quarters, the raw material of scrap is not considered to have enough purity for use in all applications and steel qualities. This is, however, only a part of the truth. In reality electro steel mills, such as those in Italy, or stainless steel producers in Europe and other places, have proven that high quality steels can be produced predominantly from scrap, as already mentioned here. It is just that the degree of purity of the raw materials is not available for nothing and insofar the quality always depends on how much the raw material consumer is willing to pay for it. After all, processing costs money.

However, since the cost, or rather the price of CO2 will continue to rise in the foreseeable future, such considerations, while being ecologically wise of course, are also economically sensible and probably even without alternative for the future. The commercial common consensus, that quality has its price, has apparently been taken in by the project participants. The scrap in the blast furnace, because of its high iron content, also has the advantage, apart from having lower emissions compared to iron ore, that the need for coke and injection coal can be reduced. This in turn helps to reduce CO2 emissions.
Of course, the insights gained from the project will lead to a gradual further development and optimisation of the recycling product. It is, therefore, a very interesting path which is being followed and which certainly deserves further observation and attention. With regard to a time scale, the project participants have announced that the production facility for the steel scrap recycling product should be ready to begin operation at an industrial level in the autumn of 2022.

The Shanghai Futures Exchange plans the introduction of a ferrochrome future
Recently the Shanghai Futures Exchange (SHFE) announced the introduction of a ferrochrome future. Whilst neither a specific start date nor further technical specifications were given, numerous market participants did, however, welcome this step of the SHFE. A ferrochrome future could bring with it attractive hedging policies for producing companies.

Chinese stainless steel producers are more inclined to import high priced chrome ore from overseas, if they have an optimistic market outlook. However, under certain circumstances, sales prices could come under pressure within the next month or two. Then the high purchasing prices and the falling sales prices would be detrimental to the profits of the Chinese stainless steel producers. Through the new financial instrument on the SHFE it would effectively be possible to hedge the actual sales price of the alloy via a short (selling) position, and still buy chrome ore from overseas without having to suffer a big loss, even in turbulent times on the commodity markets. In the same way, other market participants, who face a reverse chrome ore price risk, could profit from the ferrochrome future.

The potential success of the future instrument depends on the acceptance of the producing companies and traders, who have to ensure the exchange market for ferrochrome reaches a critical size. Only then will sufficient liquidity and market depth be reached. In April 2017, the London Metal Exchange (LME) mentioned the possibility of a ferrochrome future in a discussion paper, but rejected it for the time being since it did not have concrete cases of application. Nevertheless, the LME reserved the right to introduce this contract at a possibly later point in time. Since then the LME has been quiet about a ferrochrome future.

Chinese state television reports on the importance of commodity price hedging
In China gambling plays a role on various occasions. It is not unusual to gamble at weddings and family gatherings as this is deeply rooted in Chinese culture. The communist leadership of the country see gambling as a bête noire of course. Therefore, casinos are only allowed in certain places, such as Macau.

Because of the very high volatility at times on the commodity markets, the SHFE has so far been criticised as scornfully as casinos, since there are also quite a lot of speculators there. There is certainly a not too insignificant portion of the exchange volume which can be traced back to speculation. Nevertheless the SHFE has its right to exist for commodity price hedging.

Now the Chinese government seems to be going through a transformation process, in order to protect the Chinese economy. A few days ago, the state controlled broadcasting station CCTV showed an interview with a spokesman for the China Futures Association. He reported in the interview that commodity price hedging is very widespread amongst large companies. More than 600 listed companies have publically announced that they use commodity contracts for hedging means. The spokesman also said that smaller to medium-sized companies, unfortunately, still need to catch up with hedging. So in the last weeks and months, the rise in raw material prices has hit the smaller and medium-sized companies in China harder than the large companies.

LME (London Metal Exchange)

LME Official Close (3 month)
May 19, 2021
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
LME stocks in mt
  April 22, 2021 May 19, 2021 Delta in mt Delta in %
Nickel (Ni) 264,246 252,072 – 12,174 – 4.61
Copper (Cu) 158,975 117,075 – 41,900 – 26.36
Aluminium (Al) 1,802,450 1,759,675 – 42,775 – 2.37

Oryx Commodity News

Oryx Commodity News informs about current, industry-relevant topics.