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Metals and the invasion: Nornickel loses partners amid war, seeks new suppliers


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Metals and the invasion: Nornickel loses partners amid war, seeks new suppliers

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Vladimir Potanin is president and largest shareholder of Norilsk Nickel, a metals producer that has lost access to capital and suppliers as much of the world shuns Russia.
Source: Mikhail Svetlov/Getty Images News via Getty Images

The world's largest producer of palladium and high-grade nickel will spend 2023 building new relationships after it lost access to capital and key logistics chains when Russia invaded Ukraine.

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This article is part of a series covering the impact of Russia's invasion of Ukraine on the metals and mining sector.

Russian war reconfigures commodity supply flows

Ukraine aims for critical minerals after the war

Ukrainian metal-makers' woes grow as attacks intensify

ArcelorMittal Kryvyi Rih continues ESG effort amid war

Rusal outruns sanctions, plans expansion

Traders profit by navigating invasion uncertainty

Nornickel loses partners amid war, seeks new suppliers

Russian metals face shaky 2023 as China's demand cools


PJSC MMC Norilsk Nickel, also known as Nornickel, is searching for alternative clients and suppliers to mitigate risks that arose from economic sanctions on Russia. The miner has had to spend its cash on maintaining production levels, delaying investments in its future, according to company documents. And its palladium business is under threat as automakers switch to platinum due to high prices and a preference for avoiding Russian supplies.

"Last year the Russian economy in general and our company, in particular, faced a number of extreme challenges," Nornickel President Vladimir Potanin said in the company's 2022 earnings report, published Feb. 10. "Unprecedented sanctions pressure on Russia forced us to rapidly adapt our operations, procurement, sales and financing to a new reality in order to mitigate emerging risks."

Nornickel did not respond to requests for comment.

Sales outlook strong

Despite the challenges, Nornickel expects to sell all the metal it produces this year, with China possibly making up a more significant portion of sales, according to a Jan. 24 Reuters report.

"We are aware of some buyers/users trying to find alternatives to Norilsk nickel products because of the attack on Ukraine. But it is not en masse, and Norilsk will sell all nickel produced in 2023 like it did in 2022," Adrian Gardner, principal analyst of nickel markets at Wood Mackenzie, told S&P Global Commodity Insights.

Nornickel expects the high-grade nickel market to be relatively balanced but palladium to be at a deficit in 2023, even as the auto industry reduces palladium use in favor of platinum.

"While [Nornickel's] production achieved planned volumes, logistical challenges associated with the conflict resulted in increased friction in sales during the early part of 2022 with around 9% of palladium produced in the first half of 2022 not realized as sales," Jacob Smith, senior analyst of platinum group metals at Metals Focus, an independent precious metals consultancy, told Commodity Insights. "Logistical challenges appear to have eased as the year progressed; however, the reorientation of sales to new markets in 2022 and beyond is not yet completely evident/factored."

The company's nickel and palladium production is expected to be lower this year due to planned repairs on a smelting furnace at a Nornickel metallurgical plant as part of its $4.7 billion capital expenditure plan for 2023.

Logistical chains squeezed by geopolitical pressure

Although Nornickel has not been sanctioned, the U.S., Canada and the U.K. have imposed sanctions on Potanin and PJSC Rosbank, the commercial bank he controls under a holding company. French bank Société Générale SA terminated its operations in Russia and sold its stake in Rosbank to Potanin's company Interros Co. in April 2022.

However, Nornickel's operating, commercial and investment activities have been hampered by U.S. and EU sanctions against Russian entities, the company said in a Feb. 10 news release accompanying its 2022 production report.

A number of suppliers withdrew from the Russian market after the invasion of Ukraine, leading to "time-consuming processes of reengineering the company's customer base and sales markets," according to Nornickel's consolidated financial statement for 2020-2022.

The company cited access to critical equipment and spare parts, along with logistics complications, as its "most acute risks" in its third-quarter 2022 production report. Nornickel said changes in the geopolitical situation were the root cause and finding new equipment manufactured in "friendly countries" was a top priority.

The company has delayed the launch of two concentration plants until at least late 2024 due to supplier issues, Senior Vice President and operational director Sergey Stepanov told Russian news agency Tass in January. In the company's 2022 results, Stepanov said the war would likely continue to impact operations into 2023.

The Western sanctions have also sharply curtailed access to financial services in Russia, compounding disruptions to the logistics chain.

Many Russian companies "are practically devoid of access to international stock and debt capital markets," and direct investment has fallen off, Nornickel said in the consolidated financial statement.

Nornickel signed additional ruble-denominated debt and recently announced the placement of 5 billion Chinese yuan in exchange-traded bonds as part of its search for alternative financial instruments, while its 2022 consolidated financial statement indicates that disruptions to its system for financing day-to-day transactions caused working capital to rise to $4 billion, compared to $1.27 billion in 2021.

Strong production amid chaos

Despite its troubles, as the conflict was ramping up in Ukraine, Nornickel met or exceeded production goals for all of its metals in 2022, the company said in its full-year production report. Nickel production increased 13% from 2021, when the company faced a series of operational suspensions, and palladium production was up 7%.

The company's stock price reflected its output. In 2022, the price fell 24.6% between Feb. 22 and Feb. 24, reaching $202.33 per share as the war began, then spiked above $350 in May before settling between $225 and $250 per share.

The production gains were at the expense of planned maintenance work, which was postponed to 2023. Full-year net income fell 16% year over year to US$5.9 billion due to lower revenue and higher operating cash costs, Nornickel said in its 2022 earnings and production releases. It also completed repairs on a separate concentrator that was damaged in a 2021 accident, bringing back its ore processing capacity to about 9.2 million tons per year.

As of Feb. 23, US$1 was equivalent to 6.907 Chinese yuan.

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