FOCUS: Coronavirus poses considerable short-term risk to Chinese nickel market

The novel coronavirus (2019-nCoV) that originated in China but has since spread to more than 40 countries poses a serious threat to the Chinese nickel market, with demand, and therefore prices, said to be at considerable risk in the short term.

While supply of nickel remains largely steady despite reports of some output cuts in China, demand for the metal has been hit by the country’s waning stainless steel sector amid the ongoing viral outbreak. This has kept nickel prices under pressure in recent weeks and is likely to continue doing so until there is a significant industrial recovery in China, market sources told Fastmarkets this week.

Measures imposed by the Chinese central government to prevent the spread of the virus, including the lockdown of certain cities, transportation restrictions and enforced quarantines for workers returning from their hometowns, have put tremendous strain on nickel’s downstream sectors, particularly that of stainless steel.

Though these measures are slowly being lifted, they remain in effect across a number of cities and provinces in China and thus are still having a material impact on logistics and on how quickly workers can return to their posts.

Ever since news of the virus first broke in January and its contagious nature became more apparent, the three-month nickel price on the London Metal Exchange has been under downward pressure; the LME nickel three-month daily official price closed at $12,360-12,365 per tonne on Thursday February 27, down by 13.4% from a close of $14,270-14,280 per tonne on January 13, the day that the virus was first reported to have spread beyond China.

The front-month contract on the Shanghai Futures Exchange experienced a similar dip over the same period, closing at 100,300 yuan ($14,293) per tonne on February 27, a decrease of 10.7% from a close of 112,400 yuan per tonne on January 13.

With supply relatively stable, weak demand spells trouble
There have been production cuts at several nickel pig iron (NPI) smelters and nickel cathode producers in China over the past two months due to the virus delaying raw material deliveries and the return of workers, with the total amount for February estimated to be around 4,000 tonnes of nickel units, according to analysts with Chinese brokerage Guotai Junan Futures.

But these 4,000 tonnes represent a relatively small volume, accounting for just 6% of China’s monthly refined nickel cathode and NPI output of 62,000 tonnes, and therefore is only likely to provide limited support to nickel prices, especially as downstream demand weakens further, market sources told Fastmarkets.

Disruptions in China’s stainless steel markets, including those of alloys and plating, are expected to reduce demand for nickel by 9,000-11,000 tonnes of nickel units this month, more than the 4,000-tonne reduction in supply, the Guotai Junan Futures analysts noted.

On one hand, stainless steel mills in China are facing a high level of stainless inventories, soft demand and squeezed margins, all stemming from the government’s measures to prevent the coronavirus from spreading further in the country.

The spot market inventory of five major finished steel products – rebar, wire rod, hot-rolled coil, cold-rolled coil, plate – in 20 large cities totaled 17.35 million tonnes on February 20, up 2.64 million tonnes or 17.9% from 14.71 million tonnes on February 10, data from the China Iron & Steel Association (Cisa) shows.

Meanwhile, subdued demand for stainless steel products in China also continues to weigh on domestic stainless steel prices; Fastmarkets’ weekly price assessment for stainless steel cold-rolled coil 2mm grade 304 domestic, ex-whs China in the country’s major market of Wuxi was 13,500-14,400 yuan per tonne including value-added tax on February 26, down 100-500 yuan per tonne from a week earlier. This is the lowest the assessment has been since July 2017.

On the other hand, supply disruptions are also taking place in the nickel market. For instance, Jinchuan Group, China’s top nickel cathode producer, cut its monthly nickel cathode output by 20% in February. This is equivalent to approximately 2,400 tonnes of nickel units based on its full-year output, according to market sources.

Despite the cut, Jinchuan Group still plans to increase it nickel cathode output by 3.5% year on year to 145,000 tonnes of nickel units this year.

“All these cuts in refined nickel cathodes maker or NPI smelters are very much following the same rationale; high inventory of raw materials or products, logistics hurdle, lack of workers and poor demand for stainless steel,” a Shanghai-based analyst said.

“As for another key raw material for stainless steel, NPI made in Indonesia, it’s operating as per normal. China’s nickel laterite ore supply is also unfazed so far,” the same analyst said.

In terms of nickel laterite ore, the raw material used to produce NPI, it is the Philippines that has once again became China’s major supplier after Indonesia’s ban on ore exports came into effect at the start of the year. But there also remains ample pre-ban laterite ore stockpiles at Chinese ports and these remain the main source of ore being used to satisfy China’s needs.

These stockpiles at Chinese ports are said to be more than sufficient for now, while market participants do not expect Philippine laterite ore exports to be majorly affected by the coronavirus.

“The ore stockpiles at ports have slightly declined since the beginning of this year due to logistical issues. Ports’ stocks stand at around 15 million tonnes, and that’s not going to dive quickly too because of the troublesome logistics, so we shouldn’t be worrying about ore supply for the moment,” a nickel laterite ore trader said.

“The Philippines has taken preventative measures for ships heading from and to China, but that impact is very limited. The first quarter is typically the rainy season in the Philippines, shipment volumes would have been affected anyway from the rain,” the ore trader added.

Earlier in February, China’s customs agency said that it would not be releasing trade data, including statistics for the country’s imports and exports, trade balance and foreign exchange reserves, for January. Instead, it will combine last month’s data with this month for release on March 7.