LONDON: Remember the commodities super-cycle?
That wonderful all-embracing bull narrative of structural step-change in commodities demand coupled with ‘stronger for longer’ pricing?
It was good while it lasted.
But as mining companies write down the mega investments predicated on that ‘stronger for longer’ bit and shareholder pressure for returns rather than volumes forces a mass changing of the guard in the sector, the super-cycle seems set to go the way of other deflated grand ideas. File between dotcom revolution and great moderation.
Yet, it was always a problematic construct.
Consider the example of nickel.
Chinese production of stainless steel, the largest component of nickel usage, boomed by 27-28 percent per year over 2009-2010, according to figures from the International Stainless Steel Forum.
Stronger for longer pricing? Nope.
Nickel prices peaked in 2007 and have never looked close to reaching those lofty heights again.
Rather than being swept up in some broader super-cycle, nickel is an old-fashioned commodity story of boom and bust.
It is one which has relevance in the new age of austerity in the mining sector.
The London Metal Exchange (LME) price for three-month nickel peaked at $ 50,800 per ton in May 2007, at which stage it had risen by over $ 17,000 since the start of that year and by over $ 30,000 since May 2006.
Stocks of nickel registered with the LME touched a low point of 2,982 tons in February 2007. Liquidity was so poor that the exchange temporarily altered its lending guidance in June that year, a move that precipitated a sell-off as spectacular as the preceding rally.
Fast forward six years and the nickel price is now floundering around the $ 16,500 level.
LME stocks stand at 159,552 tons with more metal arriving daily, putting the February 2010 all-time high of 166,476 tons within spitting distance.
True, the scale of current increase in exchange stocks may reflect more aggressive behavior by warehouse operators keen to incentivize surplus metal into their sheds.
But that affects more the distribution rather than the size of underlying surplus, assessed last year at 86,500 tons by the International Nickel Study Group.
There are few analysts who expect the nickel market to record anything other than another big surplus this year either.
The current feast is directly linked to the previous famine of six years ago.
Faced with stratospheric prices for their key raw material input, Chinese stainless steel mills dusted down a production process that had been tested years previously in the West but rejected as too expensive.
Nickel pig iron (NPI), a rough-and-ready substitute for ferronickel, was intended as an emergency stop-gap to tide buyers over until the LME price normalized.
It has become, though, a major production stream in its own right, reducing China’s reliance on imported units.
Quite how major it is difficult to say, since NPI falls between the cracks of China’s official statistics coverage, leaving analysts relying on estimates, partly based on the amount of nickel ore the country imports from origin countries such as Indonesia.
The broad range of estimates for NPI production last year is 250,000-350,000 tons of nickel contained with much hot dispute as to where the true figure lies within that potential spectrum.
Even taking the mid-point of that range, this ‘new’ production stream accounted for over 17 percent of global nickel output last year.
And every ton that China makes itself is a ton it doesn’t need to import.
Look no further to understand the disconnect between booming Chinese stainless production and nickel market surplus and price under-performance.
Moreover, Chinese operators have successfully reduced production costs on an almost continuous basis.
A couple of years ago the consensus thinking was that NPI production costs were well north of $ 20,000 per ton.
That figure may have dropped to below $ 16,000 per ton as a new breed of producers using rotary kiln technology replace the first NPI generation.
It is a continuously moving target.
Viewed as a passing phenomenon with a cost structure at the top end of the global cost curve, NPI wasn’t taken seriously by producers in the rest of the world, who embarked on a series of their own expansion projects.
Several were themselves experimental, using the relatively new high-pressure-acid-leach technology (HPAL) to tap nickel lying in laterite deposits rather than the sulfide deposits which feed more conventional production processes.
HPAL had only been put into commercial production a couple of times before with highly mixed success. The quarterly operating reports from the Murrin Murrin site in Australia were a three-monthly reminder of the difficulties in achieving consistent nameplate production.
The much bigger Goro project in New Caledonia appeared to confirm all the HPAL problems. Hugely delayed, hugely over budget, Goro, now operated by Brazil’s Vale, has
produced around 10,000 tons of nickel in intermediate form over two years of stop-start operations.
Vale is undeterred, saying it now expects Goro to reach around 50 percent of its 60,000-tonne per year nameplate capacity later this year.
We shall see.
However, what has also become clear is that Goro is not typical of the HPAL process.
Three other projects appear to be doing just fine.
First Quantum has just achieved its first full year of production at the Ravensthorpe mine in Western Australia, an asset it picked up on the cheap ($ 340 million) when BHP Billiton threw in the towel on making it work back in 2009.
Ravensthorpe produced 33,000 tons of nickel in intermediate form last year and is forecasting the same again this year.
The Ramu project in Papua New Guinea also uses HPAL to produce an intermediate product and, according to the latest operating report from minority shareholder Highlands Pacific, it is now well advanced into its commissioning phase. Production last year was 5,800 tons of nickel contained.
The Ambatovy project in Madagascar is more technically ambitious, using a straight-to-metal process design.
But, again, things seem to be going well, judging by the latest update given by stakeholder and plant operator Sherritt International.
Finished nickel production came in at 5,700 tons last year. Commissioning is continuing and Sherritt said it expects commercial production to be reached this year with forecast output of 35,000 tons.
Madagascar appeared for the first time on the list of origin countries for Chinese refined nickel imports in January, a sign that Ambatovy is already making a mark on the global market.
Arguably the world might have needed all this extra nickel, and that from other more conventional projects nearing completion such as Xstrata’s Koniambo, were it not for the spectacular rise of NPI production.
But the reality is that two different types of production revolution are now coinciding to swamp the world with surplus metal.
Short of some currently unforeseen explosion in stainless steel demand this year, the price implications for nickel are gloomy to say the least.
But this is no more than the sort of boom-to-bust cycle long characteristic of the metal markets. And in this case one that has been untouched by any super-cycle.
It should also serve as a reminder to both shareholders and management of mining companies not to get over-ambitious in terms of massaging market dynamics.
Ivan Glasenberg, head of Glencore and future head of the merged Glencore-Xstrata, has talked this week about managing supply to “keep the market tight for a while” during boom times.
Nickel is a warning that high prices and a tight market can have totally unexpected but long-lasting consequences.
In other words, be careful what you wish for.
— Andy Home is a Reuters columnist. The opinions expressed are his own.