LME nickel future unable to hold price levels. News from Indonesia coming thick and fast. Nickel market in focus at the LME week in London. Brokers receive a questionnaire from the LME.

A return to normal is probably just a matter of time. Permanent decoupling and lack of a representative LME nickel quote would be a problem. Reuters takes a survey on price expectations for 2020.

Mood at the LME week not as bad as reports in general. Is a recession being talked up? Europe does not have a strategy for dealings with countries of differing interests and systems.

Germany Steel Recycling Association BDSV has made a study about scrap bonus. Indonesia could scare investors off with a policy of volatile announcements. Protective tariffs can also lead to sluggishness.

LME nickel future in reverse gear
The nickel price on the London Metal Exchange (LME) had to give way finally. The high rates of over USD 18,000.00/mt could not hold. However, the highs had also been viewed rather sceptically by quite a proportion of the market. The general economic data, and the stainless steel climate especially, did not really give reason for such an upswing. Of course, the market was caught on the wrong foot by the ban being brought forward on the export of unrefined ores, without further exemptions, and all the news regarding this which was coming out of Indonesia. Also the battery story is still making the rounds, in times of low actual usage (still?), due to a slow demand in electric vehicles. Huge advances have, therefore, not yet been made here. As already reported here, the firm market climate, in contrast to the trend in other base metals, was more likely a result of systematic purchases of nickel which led to a continual drop in LME nickel warehouse stocks, which, however, have calmed down in the last few days. In the short-term this had resulted in a considerable technical market squeeze on the LME causing a backwardation situation.

The nickel market a focal point during the LME week
And so then, during the traditional LME week at the end of October in London, when referring to nickel, there was only one main topic: the “unknown” omnipotent nickel buyer and those helping. Highly critical concerns were, at times, very loudly expressed about the LME nickel market becoming isolated from actual market and supply conditions, a situation which was obvious to everyone. And the concerns are not without reason.

Should the LME nickel future, in the long-term, not be a representative reflection of the physical nickel market, then the success story of this commodity futures contract will soon come to an end. The derivative could then also not be used as an adequate hedging instrument by industry, producers and consumers. Therefore, it comes as no surprise that the LME has begun an investigation into certain transactions on the nickel market. The Exchange is certainly aware of the importance of the matter. The LME nickel future is, after all, in 1979 the last “big” contract to have been introduced on the LME, and with resounding success. Consequently the LME will do all it can to avoid damaging the reputation of the nickel future contract.

Brokers and banks receive questionnaires from the LME
But, independent of the questionnaires, which have been sent to the brokers on the LME to try to shed light on the suspicions already held, there are still other hard facts which cast doubt on the movement’s sustainability. It is almost common sense to acknowledge that the reason for the price rise is a result of a concerted buying policy of a powerful and commanding market participant. Above all, experienced and long time members of commodity markets can quickly bring to mind similar situations from the past. As already seen, even for an extremely strong player with deep pockets it becomes difficult if all the market is aware of the position and begins to speculate against it. A similar situation in the oil market of autumn 1993 led to the dismantlement of Metallgesellschaft, a German company quoted on the stock exchange. Falling oil prices had led to an irreversible liquidity crisis.

If market rumours are to be believed, this unknown player in the nickel market should become nervous if prices move too strongly in one direction, namely a downwards direction. But, since in this case, this is more about rumours and gossip than bare facts, we have to wait and see how matters develop. However, big surprises can certainly not be ruled out.

Probable scenario: normalisation of market distortion only a question of time
If opinions here are to go by, the obvious market distortion should soon normalise again. And from two sides: on the one, nickel prices should settle again where they belong, influenced by supply and demand, on the other, increasing commodity demand should ensure that there is a rebound in the discounts on non-LME grades which in the meantime have crashed through the floor. Ultimately, for steel works furnaces it makes no difference where the nickel has come from originally. According to the periodic table of elements, nickel remains a chemical element with the symbol Ni and its atomic number is 28. And in order to use this opportunity to also align with an economic theory, the last requested unit at the highest price (marginal price) determines the equilibrium price for a commodity. It is not seldom that these facts are pushed into the background by actual market conditions (buyers versus sellers market). However, this changes nothing about the factual truth and relationship to reality for the medium and long-term average.

Reuters survey on nickel becomes a quiz
Traditionally, during LME week, the news service Reuters takes a survey on the expectations of brokers and bankers for base metal prices. And also the level of the nickel price for the coming year 2020 is asked about. 27 members of various financial institutions gave a mixed picture. Those questioned saw nickel in 2020 at an average price of USD 16,273.30/mt, whereby the range given in the answers is remarkable. Answers given were between 12,200.00 USD/mt and 19,003.80 USD/mt. Even on the question about whether there would be either a supply deficit of a surplus in supply, the answers ranged from a deficit of 159,000 mt nickel to a surplus of 91,000 mt. Only nine participants actually dared to express their thoughts on the supply situation for 2020. Very probably most of the answers are based on pure guesswork. In other words: A dart thrown by an ape would have produced a similar forecast with such a wide range.

Despite Brexit and other challenges no bad mood in London
On the whole, quite a good mood could be felt during the LME week. No comparison to the catastrophic years of 2008 and 2015, where participants nearly choked on the olives in the shaken but not stirred vodka martinis. Of course, future Brexit development was and still is, especially in London, a non too little determining factor. But, if private and public remarks, especially those of the British participants, are taken, it seems, and perhaps not really surprisingly, that a certain weariness and tiredness has indeed set in. This can be seen in many ways, but also in that the whole Brexit issue has become the target of jokes and derision. Even the CEO of the LME, Matthew Chamberlain, in his speech at the LME dinner, had no problem in making fun about the continual extensions of Brexit. In actual fact, at the start of his speech he said to his guests “You have to imagine that we have the year 2192, and the British Prime Minister is once again in Brussels to request a further extension of the leaving date”.

If companies are listened to, although in all honesty not always a representative random sample, there are difficulties in certain areas, but no trace (fortunately) of a big global crisis. For some time now, it is more likely that a crisis is being talked up, and it will not take much for it then to also become reality. This has been the case since Trump’s administration declared a trade war on China and other states of the world.

This does appear foolish considering what this means for one’s own country, and that, at the core, it is all just about one person trying to be re-elected. On the other hand, it is also impressive to see how an average talented person, with the support, however, of the apparatus of a powerful nation, is actually able to cause such global waves. In the past, Europe and the USA were able to stand together with the same values and principals, but since Trump this is passé. Now the strong rule, pure Darwinism, insults have become the standard, different truths exist and so on.

But this is also a fault of Europe. People here have always been somewhat naive, and not only in the assumption, that, along with a successful economy, democracy could also be exported to all corners of the earth. As long as in other countries, often in the developing and emerging nations, economies were improving, then something could be gained from the western ideas and values. But hardly does development start to stutter, or the hopes of the general public are not fulfilled, then, often with military help from the West, the hastily constructed structures of democracy have a boomerang effect. Repeatedly, extremist and often religious fanatical parties have then come to power frequently leading to the collapse of young democracies.

Germany and the rest of Europe have yet to develop a clear strategy as to how to handle countries with conflicting systems and values, and also interests, as is the case at the moment with the USA. China, from a different cultural and historical aspect has a clear pragmatic direction in regard to cooperation with other countries. Above all, it is in their own self interest to, as a rule, stay out of internal matters of other nations. Whether right or wrong, it is a fact. Germany and Europe must find a way of dealing with this situation for the future. It is about achieving economic goals without revealing too much about own values. Not an easy undertaking. In this context, should anyone be interested in delving into this further, we can recommend a book entitled “Der Westen und die neue Weltordnung” (The West and the New World Order) by Heinz Theisen, published in 2017 by Kohlhammer.

BDSV presents a Fraunhofer study about the bonus of scrap
The Federal Association of German Steel Recycling and Disposal Companies (BDSV), on the occasion of its annual meeting on the 13th/14th November 2019 in Münster, will present a new study entitled “Scrap Bonus – External costs and fair competition in the global value added chain of steel production”. Research partner of the BDSV is the Fraunhofer Institute, IMWS. The study is about quantifying the welfare benefits for society which arise from steel and stainless steel recycling, and which have hardly attracted the attention of policy makers and a wide section of the public. This study should help to change this.

Indonesia could scare off investors long-term
The US daily newspaper, Washington Post, recently published an article about the intended export ban of unrefined nickel ore in Indonesia. The government has the aim of increasing its domestic value added chain within its own borders. The author of the article does, however, ask the question, whether the action taken by the Indonesian government does actually increase the economic prosperity of the nation in the long-term.

At first glance, the Indonesian government does seem to be successful with its measures. There are already 11 nickel ore processing operations, with a further 25 in the planning stage. The steps taken are showing some effect. But, since 2013 there has been a stagnation in direct foreign investment with 30 billion USD per annum. After such an export ban was temporarily introduced in 2014, which will be re-introduced from 2020 onwards, two years earlier than first announced, investors could now feel that investments in Indonesia should be treated with caution after so many changes of direction.

Furthermore, it has to be considered that it is not only the Indonesian government which is concerned about its domestic industry. The basic rule is that as soon as one country massively subsidises an industry, foreign competitors demand protective tariffs. Even the Chinese have already imposed anti-dumping tariffs of 103.1% on Indonesian stainless steel. Therefore the author in the Washington Post views the tactic of the Australians as more successful in the long-term. Australia has more or less confined itself to the role of exporter of raw materials and leaves it to other countries to process these raw commodities.

In conclusion, the writer of the article even sees parallels to the policies of Latin American states after the second World War. After states had introduced protective tariffs in order to develop domestic industry, Latin American companies were not able to stand on their own two feet long-term. In view of present day unrests in Chile and Argentina, this policy was not successful.

LME (London Metal Exchange)

LME Official Close (3 month)
November 11, 2019
  Nickel (Ni) Copper (Cu) Aluminium (Al)  
Official Close
3 Mon.Ask
LME stocks in mt
  October 14, 2019 November 11, 2019 Delta in mt Delta in %
Nickel (Ni) 94,134 65,064 – 29,070 – 30.88%
Copper (Cu) 277,350 234,200 – 43,150 – 15.56%
Aluminium (Al) 983,600 940,500 – 43,100 – 4.38%

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