The Ottoman Slap

During the month of January 2018, nickel prices firmed up considerably on the London Metal Exchange (LME). Towards the end of the month, and into February the threshold of USD 14,000.00/mt was briefly broken on the upside. But the joy of new levels was short lived. For, just as already written about here, rising oil prices and differentiated statements of central banks about monetary policy increased the fears of rising interest rates amongst market followers. And since there are, however, only just a few independently minded investors about, and the automatic trading systems, which react to technical chart points, just work with formulas and are therefore without any “sense or reason”, the result was, that the stock markets were hit with a considerable price-slide. The USA and Asia, more than in Europe, were hit especially hard. But these markets, in the view of the analysts, were already much more overheated than their European counterparts.

Independent of all this, however, the correction seems too much and too early, for the real economy is doing well, and interest rate increases as well as a reduction in the extremely loose monetary policy are certainly necessary for a sustainable long-term economic and business development. It was not altogether very surprising that as a consequence of the stock market corrections, there was a spill-over effect in other markets. Unfortunately, we have had to come to terms with the fact that such events always bring down commodity markets too, even when there is still strong demand. Nickel (and the other base metals) took big corrections across the board. The LME nickel future fell temporarily once more below USD 13,000.00/mt, to be exact, to a low of USD 12,755.00/mt. But this was really just very briefly, as the markets came to their senses. At the time of writing, nickel is trading once again above USD 14,000.00/mt. Not really surprising considering the good economic environment.

In general, it would be better and is to be wished for, that events on the markets, no matter in which segment, would follow economic underlying data, rather than the actions of nervous contemporaries who describe themselves as being professional investors. On the other hand though, they have long been incited and encouraged by Mrs Yellen, Mr Draghi and company, who have been flooding the markets with liquidity, so that anything which could look to be signalling a quick end to the expansive monetary policy, can cause such a panic amongst investors. But now, there will certainly be a quietening down in the markets, and with it, commodity prices can once more move in the direction fundamentals are pointing. But along the way, strong corrections are always possible.

Reuters has reported that the LME is, in the meantime, considering issues such as Corporate Social Responsibility (CSR) and Compliance. The consideration is to remove those primary commodity producers from the list of LME approved Exchange suppliers who carry out their mining and production under unacceptable conditions. But the question has to be asked, why only now? The discussion has been triggered by the cobalt production in Africa, where children are being used as workers in quite a few mines. The Exchange is, therefore, planning to publish a set of principles for responsible procurement of raw materials.

Suppliers, who wish to be accredited by the Exchange in the future, have to be able to prove that they are abiding by these principles. But it is not just the Exchange which expects that suppliers have to ensure that cobalt and other raw materials are not being procured under unacceptable or unethical working conditions. Even the big consumers, such as Volkswagen, expect such affirmations made by their suppliers. The OECD (Organisation for Economic Co-operation and Development) has already also developed its own standard on this.

Standing out from all this, it has long been known that stainless steel and steel recycling was and still is a sustainable alternative to raw material mining in conflict regions or out of big mines which are detrimental to the environment and the working populace. By maximising the use of scrap, the negative effects of mining for raw materials are reduced in those countries: no child labour, less land usage, no resettlements and shorter transport routes. It could even be that Volkswagen will soon be asking for assurances from steel suppliers that these have been procured to a large extent under the aspects of CSR by using sustainable scrap.

In connection with the new economic agenda of China, the news agency Reuters has reported that the Ministry for Industry and Information Technology wants to change the goal set to be met in 2020 for the reduction of its steel production capacity to be met this year in 2018 already. A total of 150 million tons capacity will be cut back. The report does, however, not say which capacity is taken at the outset before the cut back is made. New steel works are still being built in China. But if there is really a clear cut back, then China is certainly being very serious in its announcements. A verification of this does, however, remain difficult. At the moment, the good steel prices, as Reuters also conclude, make it difficult for the biggest steel producing country in the world to convince its steel producers of the necessity of this step. But then again, in a dictatorship persuasion can take on different forms. Sometimes it is just a matter of decision-making.

The customs authorities of the Russian Federation announced that Russian nickel exports to countries outside the CIS (Commonwealth of Independent States) fell in 2017. In 2016 they still reached 185,300 tons, but in 2017 had a considerable cut-back of 49,000 tons, or a drop of 26.44% going down to 136,300 tons. Initially it was concluded that the down-turn was a result of sanctions adopted by some countries against Russia. But basically, primary nickel is not part of this.

Furthermore, it has been well known in the market for a long time now that any change in production by the biggest Russian producer, Norilsk Nickel, would lead to a significant decline in nickel production. According to a recent report by the news agency Platts at the end of January, the nickel output of Norilsk had decreased from 235,749 tons in the previous year to 217,112 tons, a fall of 18,637 tons, or 8%. The decrease was attributed mainly by the reduction of low-margin processing of third-party feed at the Norilsk Nickel Harjavalta facility in Finland. But this is still not really a plausible explanation for the clearly distinct fall in exports. However, if a closer look is taken at the data of the Chinese customs for 2017, as published by the data agency Shanghai Metals Market, then the explanation can quickly be found. Imports of unwrought nickel (refined nickel and nickel alloys) from Russia to China fell by almost 50% between January and December 2017.

The difference between that and the figures above is probably caused by the Russian statistics which include alloys. If all supplying nations are taken, then the imports of unwrought nickel into China have dropped by 35.46%. The main reason for this, or rather, the replacements which have been used to cover Chinese demand are quite obvious. It is justifiable to say that the (renewed) rise of nickel ore exports from Indonesia is the cause. There was here an unbelievable, and a somewhat contradictory change in export policy which has increasingly allowed the export again of unrefined nickel ores.

In 2017 a total of 35,025,708 tons of nickel ore were exported to China, which was about 9% more than in the previous year, of which 3,839,989 tons came from Indonesia. For Indonesia this represents an increase of 1,030.10%, which shows that the imports in 2016, because of the export restrictions, were very low. If the import tonnage of nickel ore from Indonesia is multiplied by a hypothetical nickel content of, for example, 1.8%, then a nickel volume of about 69,000 tons can be calculated. Therefore, the conclusion can be made that in China, primary nickel of Russian origin has been substituted by nickel ore of Indonesian provenance, which is processed in China into nickel pig iron (NPI). Additionally, what also could have had an effect on imports of refined nickel from Russia to China in the present year of 2018, is the fact that, according to the Chinese Finance Ministry, an import tariff on refined nickel in the amount of 2% has been imposed as of the 1st of January 2018. Specifically, nickel products which have the customs tariff number 7502 1090 are liable to the customs duty, so this includes most of the uncut nickel cathodes which, for example, are imported into China from Russia, Finland, South Africa and Brazil.

The Deutschlandfunk and other media outlets have all been reporting that the Turkish President, Erdogan, has been threatening US troops with consequences. No regard was taken in the Turkish attacks on the YPG Kurdish military in Northern Syria. Of course, no direct attack was made on American soldiers. As a small tip, he advised the US troops that they would be better not to stay in the vicinity of terrorists. Erdogan also said that the Americans had apparently not yet received an “Ottoman Slap” (his words). This has to be digested without comment. By the way, carnival is over for this year.