Indonesia’s Export Ban for Nickel Pig Iron: Negative Impacts on Chinas Stainless Steel Production?

May 7th, 2014 by Heinz-Jürgen Büchner, Frankfurt

In January 2014, the Indonesian government announced an export ban for Nickel Pig Iron (NPI). The government will only allow a quota of twenty percent of the former export volumes of untreated NPI and will hold the rest of the NPI ore in the country. The main reason is to increase the added-value from Indonesia’s high nickel ore resources.

Today between 500,000 to 550,000 tons of nickel – around a quarter of the global refinery production – are produced in China on the basis of mainly Indonesian NPI. China has become the biggest nickel producer worldwide. China uses its nickel production primarily as an alloying addition for stainless steel: Stainless steel contains on average of between ten and twelve per cent of nickel. The country is the leading stainless steel producer worldwide with a production volume of 19 million tons and a global market share of 50 percent in 2013.

What are the consequences of the Indonesian export ban for China and the global commodity markets? Firstly, since the beginning of January the nickel prices skyrocketed by more than 3,000 U.S.dollars per ton. Secondly, financial investors came back to the market: Since February 2014, the volume of nickel future contracts rose by a third to around 200,000 contracts at the end of March 2014. Finally, we have to discuss the question whether China will be able to hold the current production level of stainless steel or if other producer countries will become more competitive within the next years.

For 2014, we see no tremendous changes for Chinas stainless steel industry. We estimate China’s reserves for the Nickel Pig Iron production to be between 250,000 and 300,000 tons, which enables China to hold its nickel production on its level of the previous year. The resulting refined nickel production is sufficient for an up to 4 per cent higher stainless steel production in 2014.

But what are the consequences if Indonesia strictly implements the export ban for NPI and other raw materials, e.g. copper ore or tin ore? In this case the Chinese inventories of Nickel Pig Iron will steadily dwindle – beginning in the second half of 2014. The price for conventional nickel ores from other producer countries will increase. The new capacities from mines where nickel ore is a by-product could stabilize the nickel demand for the next two years. The oversupply of nickel refinery production over the nickel usage will decrease and we forecast a further price increase for nickel resulting in higher stainless steel prices.

Not later than in the second half of 2016 China’s stainless steel industry could get a problem. Without cheap Indonesian NPI the nickel refinery production as well as the stainless steel production will be less competitive. European and Asian producers outside of China are able to reclaim lost market shares. Nickel prices will fluctuate between 25,000 and 30,000 US-Dollars per metric ton.

In our view, the possibility that Indonesia will enforce the export ban very strictly is below twenty per cent for the next two years. After the depreciation of the Indonesian rupiah the country needs the revenues of its raw material exports. Therefore we only expect a reduction of the volume of NPI exports and other raw materials in the short term. Today, one of the main reasons is that Indonesia has not sufficient domestic capacities to refine the NPI completely in the country. But for the medium-term and in the long-term Indonesia will build up new capacities either alone or together with some foreign investors.

This could result in changes in the competitive landscape in the stainless steel industry.

 

 

 

 

 

 

 

Dr. Heinz-Jürgen Büchner
Managing Director Industrials / Automotive, IKB Deutsche Industriebank

 

 

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