Chinese stainless and nickel market update :: Macquarie Research

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Chinese stainless and nickel market
update
 Since the LME nickel price came under downward pressure from mid-July
2011, the Chinese domestic market price has traded at a premium to the LME.
As a result there has been a gradual pick-up of Chinese buying from the
international market, and this should be reflected in a boost in recorded
imports in the coming months.
 Coming out of the summer slowdown, we will see a further ramp-up of
Chinese stainless steel production after seasonal maintenance closures.
There is speculation some stainless mills are going to scale back to normal in
August from a 30% MoM drop in July 2011 because of the end of their
seasonal machinery maintenance works.
 As a result we are beginning to have steel mills compete in the raw materials
market to source nickel feed in order to beat production targets. However,
nickel pig iron (NPI) supply in China has been affected by the power rationing
over the summer. In Jiangsu and Guangxi provinces, almost one-third of
production has been cut due to power shortages. Therefore, the prices of NPI,
especially for the higher-grade material with nickel content higher than 10%, is
now being offered at a premium to refined metal prices for the first time since
early-2010.
 We estimate that Chinese NPI production has been running at 300ktpa plus
(metal contained) since June compared with 500ktpa plus of installed
production capacity. We estimate roughly 115kt of NPI (nickel units) were
produced in the first half of 2011, with annual production now forecast at
263kt, compared with 160kt in 2010.
 The cost of making NPI in China has been rising significantly this year as a
result of rising nickel ore prices, especially for the higher-grade material
coming from Indonesia. We estimate the marginal production cost of NPI in
China is currently running at $18,000–19,000/t at the moment, which is still
about 15% lower than its selling price. There will be ramp-up of existing NPI
production capacity after the cap on power supply is lifted at the end of
August.
 We believe the global nickel price will be supported in the short run given the
potential rise of Chinese nickel imports in August and September. However
prices will begin to suffer the downward pressure in 4Q11, when all NPI
production is back on stream.