‘Data not accurate’: Macquarie’s nickel veteran says rout ending
By Hans van Leeuwen, 5/3/2024
The nickel turmoil of last year may blow over more quickly than previously expected, according to Macquarie’s 44-year veteran nickel watcher Jim Lennon, as unexpectedly high Chinese demand and potentially slower Indonesian growth rebalance the market.
Mr Lennon has just returned from a visit to China that has triggered a “major change” to Macquarie’s forecasts for nickel – a market in which prices nose-dived by almost 50 per cent last year, and which many analysts still expect to be stuck in the doldrums this year.
He and his team discovered that Chinese stainless-steel makers and other users of nickel alloys were boosting their output more than almost anyone had realised, so the debilitating Indonesia-led supply glut was far smaller than thought.
“Everybody … subscribes to information in China that gives us the data. But it’s only by going there that you start to realise that the official data is not accurate,” he told The Australian Financial Review. “Essentially, demand in China was much stronger than most people had in their numbers.”
This unseen level of demand means there is less nickel inventory sitting in Chinese hands than previously assumed. And that means Chinese steel producers and other manufacturers using alloys will have to come back to the market for more nickel.
“The price coming down was entirely legitimate because there was an oversupply. But I’m saying that the oversupply wasn’t as big,” Mr Lennon said.
The discovery has prompted Mr Lennon to cut his forecast nickel surplus for 2024 from more than 100,000 tonnes to less than 40,000 tonnes – “a major change from our recent forecasts”, his team said in a note issued late last week.
“That means that, moving forward, the market can correct a lot more quickly. It’s not as if there’s a mountain of inventory that’s got to be worked off before you get back into a balanced market.”
Indonesia’s licence changes
That in turn means that if nickel supply growth from Indonesia falters – which Mr Lennon reckons could happen – the market could even swing from surplus to deficit. This could even be the trigger for a nickel price increase.
“The only thing that would make the price recover strongly would be if the Indonesian government restricts the number of ore production licences,” Mr Lennon said.
Jakarta recently switched from a regime of one-year mining licences to three-year permits, and attached new conditions including environmental requirements. The authorities will also track the nickel, only allowing exports that come from licensed mines.
The reforms had slowed the issuing of permits, Mr Lennon said. Gradually the Indonesian government was now issuing the necessary number of licences, but “what we’re hearing from the Chinese producers is that when they [the Indonesian government] are renewing the licences, they’re not giving extra tonnage”.
“So that then has meant that there’s a bit of tightness developing in the ore supply because there are a lot of new projects that are still coming onstream. And if they don’t get an extra allocation, then they’re going to struggle,” he said.
“The issue is, what happens next? Pretty much the indications we’re getting … is that maybe they’re going to restrict the growth in licences, in which case then the market is getting back to balance.”
But Mr Lennon speculated that, based on recent government comments, Jakarta would be looking to avoid over-tightening supply and fuelling unsustainable price increases.
“You don’t want to create volatility in the price that makes the auto makers say that over the longer term they want to use something else,” he said.
Although it was unclear what would happen to Indonesian supply, Mr Lennon’s findings on Chinese demand were more clear cut. The unexpected growth in nickel use by manufacturers and steelmakers “meant we’d probably underestimated the consumption by about 100,000 tonnes”.
Chinese puzzle
Macquarie’s new estimate is that Chinese nickel users consumed just under 2.1 million tonnes of production, while most analysts’ estimates were in the region of 1.97 to 1.98 million tonnes.
Their higher output of steel and other manufactured products might represent over-production, which could lead to cuts in the year ahead. But Mr Lennon did not think so: “I didn’t find any evidence of any massive hidden inventories of stainless steel, for example,” he said.
“It looks like China was pretty good last year: copper, aluminium, nickel, all these markets grew faster than certainly we thought. At the start of last year, we were projecting 2 to 3 per cent growth in aluminium and copper, that turned out to be about 5 to 7 per cent.”
This seems at odds with the sluggish performance of the Chinese economy, but Mr Lennon suggested the demand could have come from the green energy transition, and the replacement of now ageing infrastructure, such as water pipes, from the early part of China’s economic boom.
China’s use of nickel in batteries for electric vehicles did not grow last year, but the destocking of raw materials could “lay the ground for a rebound this year”, Mr Lennon said.
His note suggested a 10 per cent increase in nickel use for EV batteries this year in China, but “if restocking takes place, the actual number could be closer to 20 per cent”.
He expected that this growth in battery demand would be met by new-generation high-pressure acid leach plants in Indonesia, which had a very low carbon intensity in the production process.
(20min delay)
