2019 PREVIEW: Five things to watch out for in China’s nickel, stainless steel markets

Fastmarkets looks at five key things to watch out for in China’s nickel and stainless steel markets this year against a backdrop of nickel pig iron (NPI) project ramp-ups and a country-wide clampdown on new crude stainless steel capacity.

NPI deficit to persist despite project ramp-ups
While the ramp-ups of a number of NPI projects were announced in 2018 and this is expected to narrow the deficit of this material in the Chinese market this year, participants have expressed doubt over whether these projects would be implemented on time – expecting to see a more persistent shortage of NPI than previously thought.

This expectation stems from issues surrounding smelter shutdowns witnessed last year due to China’s stringent environmental policy and the delayed construction of projects in Indonesia.

“Some [stainless steel mills] in China will continue to face a shortfall of NPI because many Chinese NPI smelters were forced to shut down during several rounds of environmental inspections across the country in 2018, leaving only a few still in operation,” an NPI trader in east China said.

“Xinhai Technology has made slow progress in commissioning the rest of its RKEF (rotary kiln-electric furnace lines) and the company has been affected by [China’s] environmental policies which can be quite unpredictable,” a Shanghai-based analyst said.

Shandong Xinhai, the country’s largest NPI producer, last year announced the addition of eight RKEF lines with a nameplate capacity for 120,000 tonnes per year of nickel contained in NPI. But only one of those lines is currently in operation, according to market participants, while the rest are expected to come into operation gradually in 2019.

“Elsewhere, such as in Indonesia, it’s also difficult to tell if planned NPI projects will be implemented smoothly given the [slow] progress on construction. For example, Jinchuan previously said that its RKEF lines would come on stream by the end of 2018, but then it said that it would delay this until at least March 2019. This is also the case for other new RKEF projects [in Indonesia],” the analyst added.

China’s Jinchuan Group and Indonesian mining company WP & RKA announced plans in May last year to build a NPI smelter in Indonesia with four RKEF lines boasting capacity for 30,000 tpy of nickel in NPI.

Fastmarkets assessed the NPI spot price, China on delivery, at 950-970 yuan ($139-141) per tonne on Tuesday January 8, down by 10 yuan per tonne from the prior week due to slowing demand ahead of the upcoming holidays for Chinese New Year on February 4-10.

Imported laterite to satisfy China’s rising demand for NPI raw materials
With China’s stainless steel industry increasingly moving away from pure nickel and instead using a more cost effective substitute in the form of NPI, the country has witnessed steady growth in demand for laterite nickel ore, one of the main materials used in the production of NPI.

Yet rising inventories of laterite ore at Chinese ports and looser mining restrictions in the Philippines – one of China’s main sources of laterite ore, the other being Indonesia – are set to provide China’s NPI industry with an abundance of the raw material this year.

China’s laterite ore imports from Indonesia stood at 10.93 million tonnes for the first nine months of 2018, up by 8.66 million tonnes from the corresponding period in 2017. Meanwhile imports from the Philippines totaled 22.22 million tonnes over the first nine months of 2018, largely stable with the same period a year earlier, according to brokerage Jinrui Futures.

“Although Chinese demand for laterite ore [for use in NPI production] has increased considerably from two years ago, ore stocks at Chinese ports have risen to 14.96 million tonnes [as of early December 2018] – the highest level in the past two years,” Citic Futures said in its annual nickel market report released last December.

“The Philippine government earlier lifted the ban on laterite ore mines which had been suspended to the violation of environmental regulations, so the laterite ore supply for 2019 should in general be sufficient,” Citic Futures added.

Market participants were similarly optimistic over a steady supply of laterite ore in the Chinese market for this year.

“We expect to see steady ore supply this year; the Indonesian ore export quotas guarantee sufficient supply despite the intermittent withdrawal of several companies’ quotas due to renewal issues,” a laterite ore trader in east China told Fastmarkets.

“Meanwhile in the Philippines, there are signs of an easing in mining restrictions; the Philippine government earlier lifted the ban on laterite ore mines and this should ensure a steady stream of ore exports from that region too,” the ore trader added.

Fastmarkets’ price assessment for 1.8% grade laterite ore, cif Shanghai, edged down $2 per tonne to $48-50 per tonne on January 8, in response to weakening demand for ore as well as sufficient ore stocks at Chinese ports.

Stainless steel supply/demand to experience no significant changes

The supply-demand picture for stainless steel in China is not expected to experience any major changes in 2019 compared with last year, according to market participants.

Stainless crude steel capacity is unlikely to increase in 2019 because China is strictly prohibiting the construction of any new crude steel capacity. At the same time, large steel mills in China have not released any plans for new stainless steel capacity.

Some participants said mills still might increase their production rates, which would result in higher output. But others were doubtful that this would be the case due to mills’ squeezed profit margins and the unlikelihood that demand would experience a sharp uptick this year.

For instance, Fastmarkets assessed the price for 304 stainless steel cold-rolled coil at 14,200-14,800 yuan per tonne on January 9 in Wuxi, the most active stainless steel market in China, the same as a week earlier.

Steel mills have limited profits based on current market prices, while profits were around 1,000 yuan per tonne in the June-September period of last year, a second analyst based in Shanghai said.

In terms of demand, several participants said that demand could rise amid the Chinese central government’s support of the private economy through means such as tax incentives. A great deal of China’s stainless steel downstream factories are privately owned, market participants said.

Others, however, were less optimistic over the prospects for stainless steel demand growth in 2019.

China’s National Development & Reform Commission expects investment growth in housing development to drop to 3% in 2019. This compares with investment growth in January-November 2018 of 9.7%, according to the country’s National Bureau of Statistics.

Delegates from China and the United States held talks in Beijing on January 7-9 following a 90-day truce in the trade war between the two, but market participants were not overly optimistic that the US would lift its import duties against Chinese products in the near term.

“The US supports its domestic stainless steel producers by cutting import volumes and it would not easily change the policies currently in place,” a market source said.

The US imposed sweeping import tariffs against China in 2018 for its alleged unfair trading practices. The North American nation has so far slapped tariffs on $250 billion worth of Chinese products, including stainless steel and its finished products.

“The China-US trade war slowed down the export of stainless finished products, such as home appliances,” a stainless steel trader in east China said.

304D products pose limited threat to nickel consumption
304D stainless steel, an invention of Tsingshan Group, was released to the public in July 2018.

With nickel content of around 3%, 304D stainless steel had caused some concern among participants that nickel consumption might be considerably reduced with 304D material being extensively promoted by the mill, as other 300-series steel products typically have nickel content of around 8-10%.

“There was quite a lot publicity about the 304D and its effect of reducing nickel demand, but actually Tsingshan promoted a similar product with the same nickel content before which didn’t have much effect on the market,” a third Shanghai-based analyst said.

Market participants have also said that 304D, initially intended to replace some 304 stainless steel products, has faced difficulty during the ongoing promotion due to mixed market acceptance and quality feedback, thus likely capping any impact on demand for nickel.

Scrap usage to grow in Chinese stainless steelmaking
Large volumes of stainless steel scrap flowed into China’s domestic market in 2018 after the shutdown of induction furnaces in the country’s coastal province of Jiangsu in May freed up vast amounts of the material, which is typically used as feedstock for stainless steelmaking via induction furnaces.

As a result, the proportion of scrap stainless steel used as feedstock in stainless steelmaking grew in 2018 from the year before and accounts for approximately 16-18% of total stainless steelmaking feed stock, according to Xu Aidong, chief analyst of Antaike, research arm of the China Nonferrous Metals Industry Association.

This percentage is set to grow further in 2019, according to the third Shanghai-based analyst, who predicts that scrap stainless steel will account for approximately 20% of the feedstock used in stainless steelmaking in China.