Nickel soars as Indonesia sales ban bites

It is not as light as aluminium, as soft as lead or as easy to melt as tin. Other industrial metals have exotic histories, including zinc, which was burnt by alchemists to produce an oxide they called "philosopher's wool". Nickel, on the other hand, was named after a mischievous sprite from German mythology by disappointed miners hoping to find copper.

That seemed apt last year when nickel prices were languishing at less than $14,000 a tonne. At least a third of nickel producers were losing money. With Chinese output surging, the world had too much of the silvery-white metal, which is mainly used as an ingredient for stainless steel.

Then, with the stroke of a pen on January 12, everything changed. Indonesia, the world's leading supplier of high-grade nickel ores, banned exports of unprocessed material. Initially, the market reacted cautiously, with the price rising just 2.5 per cent in a month. But as it became clear that the ban was unlikely to be repealed, speculators rushed in, driving up the price. The potential for sanctions against Russia's Norilsk Nickel, a big producer, over the Ukraine situation further encouraged investors.

In April, nickel was the best performer of all commodities, rising 15 per cent. On Friday, nickel for three-month delivery on the London Metal Exchange traded at $18,250 a tonne, a 31 per cent rise year-to-date. Trading in call options, which give the buyer the right to purchase metal for a set price on a given future day, has surged.

"Every hedge fund manager and his dog is long on nickel," says Jim Lennon, commodities consultant at Macquarie, who expects prices to rise as high as $30,000 a tonne in 2016 if the Indonesian export ban remains.

It is not hard to see why people are bullish. Last year, the world produced nearly 2m tonnes of nickel. Around 450,000 tonnes of it - nearly a quarter of total output - was made from Indonesian ore, mostly in China, analysts estimate. Chinese factories processed the material into nickel pig iron (NPI), which is a cheap alternative to pure nickel.

No other country has the volume or grade of nickel ore to replace the lost Indonesian supply.

"This has been a game-changing event for the industry," says Stephen Briggs, an analyst at BNP Paribas.

The Indonesian government proposed the ban on ore exports in 2009, to promote industrialisation and capture more of the metal value chain domestically. But few people expected the law to be implemented. As a precautionary measure, Chinese NPI producers and traders stocked up on Indonesian ore and refined nickel towards the end of last year, accumulating enough material to last around 9 months.

These inventories have allowed Chinese factories to keep operating this year when the Indonesia exports ceased. But the stocks of ore are falling and the price has doubled with traders holding back material from the market. Some small Chinese NPI plants have already shut, says Mr Lennon. Rather than registering a large surplus, the nickel market is likely to be roughly balanced this year, thanks to the high ore stocks - but will move into a major deficit next year unless the Indonesian ban is relaxed.

The prospects of that happening soon, if at all, appear slim. Indonesia will hold presidential elections in July and the winner will not take office until October. Revisiting the ore export ban is unlikely to be the first priority of the new government, Mr Briggs says. And while some powerful local businessmen affected by the law will be trying to get it repealed, the measure has support from the main political parties as well as multinational nickel miners and producers, who are benefiting from higher global prices.

Glencore Xstrata, which earns an extra $170m annually for every 10 per cent rise in the nickel price, publicly advocated the ban last year, saying that Indonesia had "a rare opportunity to positively influence the market and generate value for the country".

A handful of Chinese companies have now started building processing plants in Indonesia, but these are unlikely to start operating until mid-2015 at the earliest, and will not come close to replacing the lost NPI production in China. The other major source of nickel ore for the Chinese NPI market is the Philippines, but its material is much lower in quantity and quality than that from Indonesia.

"It's simple: the ban stays in place, the nickel price goes up further," says a metal trader based in Singapore. "Prices above $20,000 are perfectly plausible."

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