Almost exactly three years ago Indonesia rocked the global nickel market by banning the export of unprocessed minerals.
At the stroke of a presidential pen the flow of nickel ore feeding China’s massive stainless steel sector was cut off.
Now Indonesia has done it again, this time by part reversing that ban.
The London Metal Exchange nickel price initially slumped 5 percent on the news to a four-month low of $9,660 per tonne before recovering to $10,275 at the Thursday close.
The tremors have spread to the equities market with the shares of Australia’s nickel producers and Indonesia’s own PT Vale Indonesia experiencing similar turbulence.
The fear is that Indonesia will ramp up both production and exports again, reversing a shift to supply shortfall in the global nickel market and killing off a budding rally in the price from the February 2016 low of $7,550.
But will it? Not only is there considerable devil in the detail of this latest policy flip-flop but much has changed in the nickel supply chain since 2014.
The first thing worth noting about Thursday’s announcement is that it shouldn’t really have come as a total shock.
As long ago as February last year Indonesia’s minister for energy and minerals resources said that some sort of partial revision to the export ban was possible, even probable.
The domestic debate has raged very publicly ever since, pitting the country’s miners, including state-controlled PT Aneka Tambang (Pt Antam), against investors, mainly Chinese, who have committed to building nickel processing capacity in the country.
The government itself has been split between those arguing that the ban was achieving its goal of forcing value-added production against those more concerned over the loss of export revenues.
The nickel market’s problem is that it has failed to read correctly the Indonesian policy debate.
There is an analogy with the original ban here. Although it too shocked the market, it had been signposted as early as 2009 when the legal groundwork was set.
It’s just the market bet that the Indonesian government wouldn’t do it. It was wrong then and it has been proved wrong again this time around.
The second key point about this latest policy shift is that it does not amount to a wholesale lifting of the ban on nickel ore exports.
As explained by Indonesia’s Coal and Minerals Director Bambang Gatot, exports will only be allowed of low-grade ore, defined as 1.7 percent or less contained metal, by processors who have excess material after meeting a minimum 30-percent usage threshold in their plants.
Which, frankly, is as clear as mud, or indeed as a handful of wet nickel ore.
You can just about discern the logic in this messy compromise. The presumed aim is to reward those who have committed to investing in processing capacity by allowing them to generate revenues from selling surplus ore.
But who is producing what from what sort of ore and how much is potentially classified surplus to requirements and therefore available for export are unknown, probably to the Indonesian authorities themselves.
The only clear short-term winner is Pt Antam, which runs its own ferronickel plant but which had historically also mined and exported ore up until the January 2014 ban.
The loss of those export revenues has squeezed the company’s revenues to the point that it has publicly warned it wouldn’t be able to invest in downstream processing capacity.
The company, according to David Wilson, analyst at Citi, may be sitting on up to 20 million tonnes of stockpiled ore. That could represent as much as 250,000 tonnes of contained nickel which could be “now potentially available to the market”. (Global Commodities Focus, Jan. 12, 2016).
Emphasis on the word “potentially” in that sentence. How much PT Antam will be allowed to export is of course dependent on the devilish detail.
Interestingly, PT Antam has been lifting its ore mining activities this year above and beyond what it needs for its own plant.
Production totaled 1.1 million wet tonnes in the first nine months of 2016, up from 432,500 tonnes in the year-earlier period.
That’s because PT Antam is now selling ore to the new processing plants that have been built since 2014. Sales to domestic third parties totaled 631,500 tonnes in the January-September 2016 period, compared with zero in 2015.
It’s a sign that the government drive towards value-added processing has partly succeeded.
Where once unprocessed ore flowed to China to feed that country’s nickel pig iron (NPI) sector, which in turn fed the stainless sector, more NPI is being produced in Indonesia itself.
There is now a steady flow of NPI to China, albeit one that is confusingly lumped into the ferronickel category by Chinese customs.
China’s NPI sector, moreover, has not given up the ghost and died away as was widely expected in the immediate aftermath of the 2014 Indonesia ban.
Ore supply has been supplemented by imports from the Philippines and, more recently, New Caledonia, while producers have upgraded technologies to reduce costs and become more integrated with stainless steel production facilities.
All of which, combined with the lack of clarity as to how much Indonesian ore can now be exported, translates into a very confused picture.
And that’s the real reason why nickel has been rocked again by Indonesia.
The market was working to a clear narrative. One in which Indonesia kept its ban in place, Philippine ore supply diminished due to that country’s environmental clamp down and the market moved to persistent supply deficit, eating up the stocks overhang that has accumulated over the last few years.
A key part of that narrative has just been challenged and analysts have gone back to their supply-demand spreadsheets to try and understand the implications of the Indonesian policy change.
It may yet prove to be not as bearish as feared but for now nickel’s comforting bull(ish) story-line has just been put on hold.