Zhan Dapeng: Combination of negative factors led to nickel price falling, weak fundamentals remain bearish in the short term
----Interview with Zhan Dapeng, senior researcher at Xinhu Futures Co., Ltd.
Xinhu Futures Co., Ltd was founded in 1995, as part of Xinhu Zhongbao Co., Ltd, with net capital of more than RMB600 million. Xinhu Futures realized great-leap-forward in its development following a reorganization in 2008, when the number of staff expanded from 52 to more than 500 and the number of sales departments increased from 4 to 22. Currently, the company possesses a futures investment consulting qualification ...
Asian Metal: With nickel futures contracts being traded on Shanghai Futures Exchange, what do you think the effect will be on nickel ore import enterprises, nickel cathodes import enterprises, ferronickel plants and stainless steel production enterprises within the nickel industry chain?
Zhan: 83% of nickel output is used for making stainless steel, and with the development of the global economy, the stainless steel industry has managed considerable development, especially in the last ten years, and production has improved steadily from 1,920t in 2001 to 3,813t in 2013, with an annual increase rate of 6%.Therefore, demand for nickel within the stainless steel industry is growing increasingly. Nevertheless, with the breakthroughs in ferronickel technology, stainless steel smelting using ferronickel has become more and more widespread in place of nickel cathodes; in addition, laterite-nickel ore has been developing rapidly in Indonesia and the Philippines, and ferronickel capacity has increased sharply in China, with nickel cathodes becoming an auxiliary material in the stainless smelting process and ferronickel used as the main raw material. In Shanghai trading circles, nickel cathodes have also became a financing tool besides supplying stainless steel enterprises, but banks have tightened the business of hypothecation and loans for nickel cathodes due to the Qingdao port incident, and this led to some shadow inventories coming into the market, resulting in the current oversupply. Launching the nickel futures will benefit the improvement of nickel pricing mechanisms, providing a standardized, transparent, fair and efficient risk-free trading platform, guaranteeing the stability of enterprise operations and serving the sustainable development of the industry. Not only is the trading of nickel cathodes capable of achieving these benefits, but ferronickel enterprises and traders, nickel ore miners and stainless steel enterprises will also avoid risks by trading nickel futures.
China’s nickel cathodes producers and traders have participated in pricing and retaining value within the LME market, with traders in particular more flexible and the arbitrage between the internal and external markets is also commonplace. However the domestic ferronickel producers have failed to recognize this, not being motivated by decent profits to do so previously. But with the price inversion of ferronickel and laterite-nickel ore, they have been forced to find a platform that retains the value of their products, and they are extremely interested in domestic nickel cathodes futures at present.
Asian Metal: The dollar has strengthened since last year and nonferrous metals have been under pressure. But it is said the dollar may see a downturn in the next few weeks following the release of a new set of economic data. What’s your opinion on this and how do you think the nickel market will react in the near term?
Zhan: It was winter in the US during the climatic anomalies in Q1 of 2015, which might have had an influence on the production of its enterprises. Therefore, its economy may have suffered a downturn from the above economic data, but when we enter Q2, the climate will turn warmer and enterprises will be able to resume normal operations, which may lead to an increase in the economic data. As for the dollar, it fell slightly when the economic data was at the lower levels and the FED (the Federal Reserve) delayed the interest rate increase; but it may become strong again when the economic data turns better and the FED will press ahead with the interest rate increase. Nevertheless, internally the FED did not accept the continued strength of the dollar, thinking it may hurt the US economy and revealed a dove-like opinion when it came to interfering in the exchange rate market, forcing a decline in the dollar. Investors should pay attention to this when judging the dollar trend. The euro zone economy should be taken into consideration as well. Although the economy in the euro zone will be weak in the short run, after QE has been pushed through, the economy may see an improvement in the future, and the euro exchange rate is likely to stop falling and become stable, while the dollar may become weaker. But the timing will not be easy to control. In a word, it’s not easy to predict any bearish sentiment towards the dollar before the FED actually increases interest rates.
The dollar index has had a negative relationship with the trend for nonferrous metals, especially in the early days when falling commodity prices and the rising dollar became a controlling factor; but once the price has dropped to the much-hyped "cost" level, the negative relationship will become weaker and the supply & demand fundamentals will become the main determinant. Therefore, the price trend for nickel cannot be predicted according to the dollar, and investors should pay more attention to fundamentals, especially the inventory and supply & demand.
Asian Metal: Nickel prices have fluctuated across a wide range in recent years, falling to a six-year low this year in particular. Do you know the reason for this?
Zhan:
1. The dollar, China’s economy, the LME inventory and fund speculation are the main factors which led to the nickel price falling. The details include: the continuing strong dollar trend; China's economic slowdown; negative support from fundamentals with continued oversupply; limited activity within the LME market, which made it easier for it to be controlled by funds; the increasing LME inventory; and the psychological level against long positions.
2. The nickel market continued with a structure of futures premiums; a short nickel market is the natural choice of hedging, for example buying copper (backwardation) and casting nickel (far month premium).
3. The LME inventory continued increasing. The total LME inventory was equivalent to 20%-25% of the global consumption of nickel, and it showed an obvious negative correlation between inventory and price.
Asian Metal: The nickel market faces many uncertainties in 2015, what’s your opinion on the exports from the Philippines? And as there are many uncertainties around nickel production in the Philippines, what influence do you think of this will have on the market?
Zhan: To quote the opinion of one of the guest speakers at the meeting, “The inventories for high and mid-grade nickel ores saw a higher level of stocks during 2013 in the Philippines due to the weak market of 2013, and the low lateritic nickel ores were mainly for export as the market for these products was running well. In 2014, low lateritic nickel ores ran slowly, while the high nickel ores market saw a significant boom. Therefore, the inventories of high and mid-grade nickel ores were mainly for export in 2014. The exports of high and mid-grade nickel ores in 2015 may not be higher than the export volume in 2014.”
Although the nickel mines in the Philippines are centralized in one country, they are dispersed over a wide area. On condition that there is no change in mining policy, stable weather and the benefits are maximized in all of the digging, they will be able to export normally. If the mining enterprises are not unified in collaboration, this is unlikely to influence the nickel price. Of course there is speculation in the market; if some emergent factors come into the market, these may support nickel ore strongly, leading to a price increase for the whole industrial chain, but there is little possibility of this occurring.
Asian Metal: The data showed that nickel production from ore during 2014 was mostly stable when compared with 2013, so the reduction in exports from Indonesia has been offset by the increase from other countries. What do you think of this opinion? Do you agree that the demand for nickel ore in China can be met by the supply from the Philippines and some other countries?
Zhan: The nickel produced from ores in 2014 was processed from the nickel ores from the Philippines and Indonesia imported during 2014 with the rest of the nickel ore inventory imported in 2013. The import volume for nickel ore in 2013 was 71 million tones according to the customs data, which showed a heavy surplus. In fact, if Indonesia continues to ban exports of nickel ores, China will have to import laterite-nickel ore mainly from the Philippines, and relying on imports alone will not be enough for domestic consumption. Fortunately, there is a sizable inventory stocked by enterprises and some inventories at ports. But if there were no ferronickel inventories, relying on the imports from the Philippines alone would not be enough. That’s the reason why the price declines for nickel ore have been less than those for ferronickel and stainless steel. However, influenced by over-speculation, the operating rate of ferronickel plants fell sharply which may lead to tensions around nickel ore supply in the second half of 2015.
Asian Metal: What’s your opinion on the effects of the EU imposing anti-dumping duties on stainless steel products from China?
Zhan: Imposing anti-dumping duties may reduce the appetite for exporting among stainless steel enterprises in China in the short term, then the capacity in these parts will be back to the domestic market and be consumed domestically, resulting in greater pressures over inventory consumption. Enterprises may stimulate sales by lowering the prices of their products (currently, prices for stainless steel are declining sharply), and then it will be possible for enterprises to purchase ferronickel by bidding lower prices, which will lead to a vicious circle within the industrial chain.
Asian Metal: Some ferronickel producing enterprises have stopped production in Inner Mongolia, Shandong, Fujian and Liaoning due to the strict environmental protection policies. What are your thoughts on stricter environmental protection policies and their effects?
Zhan: It is expected that the stricter environmental protection policies will become normal in the future, as required by citizens and political imperatives. New environmental laws will expand the closures of outdated production facilities and speed up transformation and upgrading. Adding environmental facilities will increase the production cost, which may have disadvantages in the short term, but bring more benefits in the long run. And local government will usually take supportive measures and provide preferential fiscal taxation to reduce pressure on costs.
Asian Metal: Ferronickel production continues to decline with falling operating rates in China. What’s your opinion on the future trend within the ferronickel industry in China? Do you think the reduction in supply is capable of supporting its price?
Zhan: The domestic nickel industry will experience a process of survival of the fittest, and the focus will turn to the areas with low power tariffs and power saving technology. For example, the power tariff in Inner Mongolia is relatively low despite there being fewer logistical advantages. The RKEF technology and some integration of ferronickel and stainless steel smelting processes in Jiangsu and Fujian have cost advantages compared with other regions; these advantages will be of greater benefit in the process of survival of the fittest.
China has no pricing powers and the nickel prices in other countries come with obvious advantages; therefore, the reduced ferronickel supply in China cannot determine the price trend (it can be replenished by importing ferronickel and nickel cathodes), but the reduced supply of ferronickel may keep the domestic premiums higher than in other countries.
Asian Metal：Recently, the window for import arbitrage has opened, and import volumes for nickel cathodes and ferronickel have seen a significant increase. Will this impact the domestic supply of nickel and will it have any influence on the future trend of the nickel market?
Zhan: Of course, it will correct the exorbitant premiums in China; although the current domestic fundamentals are flat, if the import volumes for nickel and ferronickel increase with sales more difficult, it will place greater stress on the market. As we can see, the spot market has now turned from premium to discount relative to the futures market.
Asian Metal: The macro aspects have been relatively weak and fundamentals have not shown any improvement. Will nickel prices continue to drop in 2015?
Zhan: I think the market will be bearish in the short term and bullish in the mid-term. In addition, do not expect too much of an increase, unless the country “prints money” and stimulates investment in the real estate and basic construction sectors over and above the expected levels.
