The implementation of legislation to restrict exports of nickel ore from Indonesia will push the nickel market into deficit by the fourth quarter and support prices, Citigroup said Thursday in a research note.
The bank notes nickel has been the worst-performing base metal so far this year, with three-months nickel having fallen 30 percent from its $22,150/mt peak in early February on the London Metal Exchange.
But Citigroup forecasts that the implementation of legislation by Indonesian authorities is likely to support nickel above its current range.
“A deficit of 5,500 mt is the central projection for market balance in Q4, providing support for nickel prices above $20,000/mt during the quarter,” the bank said.
Citigroup notes that Indonesia accounts for 23 percent of global mined nickel production and nickel ore from the country accounts for 60 percent of China’s production of nickel pig iron.
The legislation states that only mining companies that have submitted concrete plans for investment in downstream processing, or have Contracts of Work and have signed an integrity pact that affirms their investment commitment, will be able to export nickel ore.
According to the bank, 600 mining companies and mineral exporters have applied for the right to continue exporting.
Citigroup notes there are three stages to the application, and the third will involve the payment of a 20 percent export tax, effective starting May 16, to all registered ore exporters.
In the short term, the bank does not expect the legislation to have a significant impact on China’s NPI production.
Citigroup states that China’s NPI producers are holding two- to three-months worth of ore inventory, and some reports suggest there is up to 12 million mt of nickel laterite ores at ports in China.
But in the second half of the year, Citigroup believes there will start to be a noticeable production impact.
It notes that only PT Vale Indonesia is currently unaffected by the legislation and that even the major Indonesian-owned nickel miner, PT Antam, has had to submit the registration paperwork to the authorities.
“In the worst case scenario (i.e. that no miners/exporters other than PT Antam receive ore export authorisation), then Indonesian ore exports could fall by 75 percent in the second half of 2012, significantly impacting ore flows into Japan and China,” Citigroup said.
But the bank believes this scenario is unlikely and that PT Antam and other partially state-owned companies will be able to resume exports over the next month.
“PT Antam themselves expect total Indonesian ore shipments to fall by 20 percent through the second half of this year through the combined impact of the ban and ore export tax,” the bank said.
Three-months nickel was trading at $16,380/mt on LMEselect at 1247 GMT.