 "Multiple pressure points for Nickel, Aluminium")
Industrial metals have been on a roller coaster kind of ride in the past couple of years, falling and rising. But for Nickel and Aluminium, going ahead too, there are multiple pressure points that suggest the recent pullback in prices may not sustain.
Nickel had a rough 2012, and so far it looks like 2013 will not be much better as prices have fallen by about 14% from the start of the year, and are down by 33% from the peak of $22,150 last year, hit hard by China's slowing growth.
Aluminium is pretty much sailing in the same boat. Prices have fallen by about 13% from the start of the year, and are down by about 20% from the peak of $2,362 last year.
China's economy has slowed down for a number of factors, including the fact that their biggest customers, the United States and Europe, are trying to claw their way out of financial problems.
There has also been a housing boom in China that's gotten a bit out of control, and now the government is trying to dampen it a bit, meaning they aren't purchasing as many resources. Manufacturing in China has been on a declining trend over the past few months. At the same time, large mining companies around the world are bringing new mines on line, which adds to the prevalent supply surplus.
Production from nickel mines is set to outstrip global demand for the second year in a row while production of aluminium has risen by more than 22% in the past 4 years. Inventories of nickel in warehouses monitored by the LME have risen by 32% during the year to a record high and those of aluminium are up 5%, painting a bearish picture for prices.
Technical innovations have slashed costs, which have in turn lowered the floor for nickel pig iron (NPI) prices. The break-even cost for NPI produced by rotary kiln electric furnace (RKEF) technology is now as low as $12,500 a tonne and its market share has soared. RKEF technology uses about a third less power than conventional production methods. As NPI is a cheap substitute for nickel, buyers often prefer it to the real thing.
While there is little to be done about low demand, some reduction in production is crucial. For instance, Chinese NPI producers are generally seen as “the high cost producers and therefore should act as the industry’s swing capacity” by cutting production when nickel prices get too low.
A string of companies that produce Nickel like Glencore Xstrata and Norilsk Nickel have closed mines or suspended productions. A similar strategy has been followed by Rio Tinto for its Shawinigan aluminium smelter and its Quebec plant.
If such reductions take place, and the excess supply in market is cornered, these metals may stand a chance of avoiding a performance as disappointing as last year’s.
However, with large, integrated operations, it's difficult for bigger companies to close mines, because the smelter depends on the ore coming from the mines.
But exploration companies who find mineral deposits and develop them in hopes of selling them to large mining companies are hurting. The viability of operations is being questioned and companies are now not striving to be the biggest producer in the world, but the best, with an eye on long-term success.
Overall both metals are in a pullback mode, but for the medium term perspective, it looks difficult to sustain on the upside. We expect upside in Nickel to be capped on the LME around $15,200-15,700 and on the MCX towards Rs 950-980, while for Aluminium, upside towards $1,950-2,000 on the LME and towards Rs 118-120 on the MCX would once again attract the bears.
The author is Head - Commodity & Currency, Motilal Oswal Securities Ltd
Nickel had a rough 2012, and so far it looks like 2013 will not be much better as prices have fallen by about 14% from the start of the year, and are down by 33% from the peak of $22,150 last year, hit hard by China's slowing growth.
Aluminium is pretty much sailing in the same boat. Prices have fallen by about 13% from the start of the year, and are down by about 20% from the peak of $2,362 last year.
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For both the metals, the downtrend story is strikingly similar. The gradual slide in prices is being caused by a number of factors; lower buying by the Chinese, slowdown in growth, an oversupply of the metal due to vast production and opening of new mines and alternative cheaper and convenient substitute for usage.
China's economy has slowed down for a number of factors, including the fact that their biggest customers, the United States and Europe, are trying to claw their way out of financial problems.
There has also been a housing boom in China that's gotten a bit out of control, and now the government is trying to dampen it a bit, meaning they aren't purchasing as many resources. Manufacturing in China has been on a declining trend over the past few months. At the same time, large mining companies around the world are bringing new mines on line, which adds to the prevalent supply surplus.
Production from nickel mines is set to outstrip global demand for the second year in a row while production of aluminium has risen by more than 22% in the past 4 years. Inventories of nickel in warehouses monitored by the LME have risen by 32% during the year to a record high and those of aluminium are up 5%, painting a bearish picture for prices.
Technical innovations have slashed costs, which have in turn lowered the floor for nickel pig iron (NPI) prices. The break-even cost for NPI produced by rotary kiln electric furnace (RKEF) technology is now as low as $12,500 a tonne and its market share has soared. RKEF technology uses about a third less power than conventional production methods. As NPI is a cheap substitute for nickel, buyers often prefer it to the real thing.
While there is little to be done about low demand, some reduction in production is crucial. For instance, Chinese NPI producers are generally seen as “the high cost producers and therefore should act as the industry’s swing capacity” by cutting production when nickel prices get too low.
A string of companies that produce Nickel like Glencore Xstrata and Norilsk Nickel have closed mines or suspended productions. A similar strategy has been followed by Rio Tinto for its Shawinigan aluminium smelter and its Quebec plant.
If such reductions take place, and the excess supply in market is cornered, these metals may stand a chance of avoiding a performance as disappointing as last year’s.
However, with large, integrated operations, it's difficult for bigger companies to close mines, because the smelter depends on the ore coming from the mines.
But exploration companies who find mineral deposits and develop them in hopes of selling them to large mining companies are hurting. The viability of operations is being questioned and companies are now not striving to be the biggest producer in the world, but the best, with an eye on long-term success.
Overall both metals are in a pullback mode, but for the medium term perspective, it looks difficult to sustain on the upside. We expect upside in Nickel to be capped on the LME around $15,200-15,700 and on the MCX towards Rs 950-980, while for Aluminium, upside towards $1,950-2,000 on the LME and towards Rs 118-120 on the MCX would once again attract the bears.
The author is Head - Commodity & Currency, Motilal Oswal Securities Ltd