(The opinions expressed here are those of the author, a columnist for Reuters.)
* GRAPHIC-Demand for battery materials: reut.rs/2zzGHaG
By Clyde Russell
LAUNCESTON, Australia, Nov 20 (Reuters) - The nickel market is learning that there is a difference in believing you are the next big thing in battery metals and the reality that you are actually still beholden to the Chinese steel sector.
Nickel was one of the darlings at last month’s annual London Metal Exchange Week, with everybody from producers, to traders and consumers talking up its prospects on the back of the expected surge in electric vehicles.
The euphoria helped drive benchmark LME nickel to a more than two-year closing high of $12,920 a tonne on Nov. 6, but since then the price has stumbled.
Nickel closed at $11,575 a tonne on Nov. 17, a drop of 10 percent in under two weeks, while Shanghai Futures Exchange contracts also showed a similar decline, dropping 9.5 percent from their peak on Nov. 7 to end at 93,630 yuan ($14,144) a tonne on Nov. 17.
The positive long-term outlook for nickel as a key component for batteries for electric vehicles hasn’t changed in the past two weeks since LME Week, but what has changed is the market view of the short-term outlook for China’s vast steel sector.
About 70 percent of global nickel supplies are used in making stainless and other steel products, compared to about just 4 percent in batteries.
While the use of nickel in batteries is growing at an annual rate of close 6 percent, according to the Nickel Institute, it will take several years before this demand becomes sufficient to act as a standalone driver of prices.
In the meantime, steel is where the action is, and given that China represents about half of global steel output, it isn’t hard to see why this sector is key to nickel’s fortunes.
The major theme currently in China steel is the output restrictions being enforced by the authorities over winter as part of efforts to limit pollution caused by burning coal in industrial processes.
The weight of these output cuts is still to show up meaningfully in production data, but already there are indications that China is cutting production.
Average daily crude steel output dropped for a second month in October, falling 2.5 percent to an average 2.334 million tonnes a day, down from September’s 2.394 million.
Average crude steel output will fall below 2.3 million tonnes in November as 28 cities fully implement output curbs between mid-November and mid-March, according to Qiu Yuecheng, an analyst with the steel trading platform Xiben New Line E-Commerce in Shanghai.
CHINA‘S NICKEL APPETITE
Even without the current steel restrictions, China’s appetite for nickel has been subdued so far this year.
Imports of refined nickel are down 51.4 percent to 155,382 tonnes in the first nine months of the year compared to the same period last year.
The drop in refined imports has been somewhat offset by an 8.8 percent gain in imports of nickel ores and concentrates to 25.96 million tonnes in the first nine months.
However, the big mover has been in imports of what China customs terms ferronickel, which are up 54.3 percent to 1.09 million tonnes.
However, the major part of that is cargoes from Indonesia, which shipped 792,393 tonnes in the first nine months, a jump of 57.1 percent over the same period in 2016.
But Indonesian ferronickel doesn’t fit the usual definition of the beneficiated, intermediate stage nickel product, as it has a much lower nickel content.
This can be seen in the price, with Indonesian ferronickel imports in September having a landed price of $1,375.98 a tonne, while those from next biggest supplier New Caledonia came in at $3,009.44 a tonne.
Chinese nickel supporters have basically turned to low quality, partly beneficiated nickel from Indonesia as a substitute for refined nickel and nickel ore.
The ready availability of this grade from Indonesia suggests that the market is far from tight, and that Chinese nickel producers have been able to show flexibility and adapt to the shifting dynamics of the market in Asia.
Overall, the picture that emerges is that while nickel may well catch a ride on the predicted boom in electric vehicles, this is a story for the future.
The current picture is one where China steel output still drives the market, and this is looking somewhat bearish for the next few months over winter, but may well enjoy a resurgence in the spring of 2018.
Editing by Richard Pullin