Summary
The Indonesian nickel ore export ban was originally expected to drive nickel prices higher in 2020 by the market. However, the demand destruction caused by the COVID-19 pandemic has lowered prices by 7% since the start of the year. In addition, we expect Indonesia's primary nickel production to expand by 46% year over year to 550,000 tonnes in 2020. The combination will drive the global primary nickel market to a 100,000-tonne surplus this year — the market's first primary surplus since 2015 — from a 33,000-tonne deficit in 2019. Average London Metal Exchange nickel prices will, therefore, drop by 7% year over year to US$12,990 per tonne in 2020.
It has been over six months since the current Indonesian nickel ore export ban began. On Aug. 30, 2019, the Indonesian government confirmed that the ban would be effective Jan. 1, 2020, two years earlier than previously expected. Previous speculation and subsequent confirmation of the ban's early implementation, combined with expectations that it would hurt China's nickel pig iron, or NPI, industry, caused the average LME three-month nickel price to jump by 31% year over year to US$13,970/t in 2019.
Consensus price forecasts as of Nov. 29, 2019, before the start of the COVID-19 pandemic, showed that markets foresaw an 11% year-over-year rise in average LME nickel prices in 2020 on expectations of a tighter global primary market due to the export ban. The COVID-19 pandemic has undercut the expectations of a bull market, however, with the associated demand destruction driving down the LME 3M nickel price by 7% since the start of the year to US$13,236/t July 20. Market participants have lowered their price forecasts significantly as a result. Consensus 2020 target prices as of June 30 showed a 10% year-over-year drop in the 2020 nickel price outlook to US$12,780/t.
Ban to severely lower Indonesia's mined nickel output this year
One aim of the nickel ore export ban was to reduce the extraction of the country's nickel ore reserves to a more sustainable rate. The policy has, however, put Indonesia's nickel mining companies, especially those without integrated NPI or ferronickel operations, in a difficult position.
Coronavirus-driven uncertainty pushed the Indonesian Nickel Miners Association, or APNI, to appeal to the government to end the export ban. The Ministry for Maritime Affairs and Investment rejected the appeal, citing contributions by exports of processed nickel products to the domestic economy during the first quarter.
The nickel ore miners are, therefore, either unable to sell their output or forced to sell to domestic smelters at lower prices than for export, depending on the ore grade. The government tried to compensate by putting a floor under nickel ore prices, starting May 14, but ore with a low nickel grade of 1.65% — formerly largely exported to China — cannot be sold to local smelters because they prefer higher-grade material. In addition, according to recent APNI data, domestic smelters buy 1.8% nickel ore for US$27 per wet metric tonne on a cost, insurance and freight basis. This is below the government floor of US$34/wmt CIF and well below the US$43-US$46/wmt CIF price for lower-grade 1.65% ore on the international market.
We expect these dynamics to force some domestic miners to cease operating or to reduce production in the near term. We, therefore, forecast Indonesia's contained mined nickel output to drop by 24% year over year to 650,000 tonnes in 2020. In future years, we expect that Indonesia's contained mined nickel output will have to increase to feed its growing nickel value-added products industry.
Frequent regulation change impeding earnings visibility of Indonesian miners – S&P Global Ratings
The rapidly changing regulation of Indonesian nickel ore exports over the past five years has significantly reduced the visibility of earnings and profitability among major domestic ore producers. This uncertainty has been credit negative for producers such as PT Antam Tbk., historically Indonesia's largest nickel ore exporter, and even more so for smaller miners that do not benefit from either vertical integration into smelting or exposure to other minerals.
First, implementation of the initial ban in 2014 required miners to increase their smelting capacity. This required hundreds of millions of U.S. dollars in capital spending and left miners' balance sheets considerably more leveraged and more exposed to fluctuating commodity prices than at the beginning of the decade.
Second, the on/off export quotas, most recently the government's decision to move up its nickel ore export ban to 2020 from 2022, have led to considerably more volatility in miners' earnings and cash flows.
Indonesia primary nickel capacity expands relentlessly amid COVID-19
The export ban was also intended to divert material normally exported to countries such as China to support Indonesia's growing, value-added nickel-processing industry, which would in turn support the domestic economy through higher-valued exports. We estimate that Indonesia's primary nickel production, including NPI, ferronickel and refined nickel, increased by roughly 30% year over year to 376,000 tonnes in 2019.
The Indonesian government said June 23 that US$3.7 billion worth of nickel and other metal smelting projects will be delayed until 2021 due to the pandemic. This is less than the US$11 billion of nickel smelting projects that were originally expected to be delayed, according to the government's February guidance, suggesting that the pandemic's impact on nickel smelting projects will be less than previously anticipated. We expect Indonesia's primary production to increase further this year, despite potential obstacles created by the pandemic. China's Tsingshan Holding Group Co. Ltd. continues to develop its NPI production capacity in Indonesia despite the pandemic. Tsingshan's and ERAMET SA's 30,000-tonne-per-year NPI project in Weda Bay started production in late April. This development is part of Tsingshan's plans to increase its contained nickel-in-NPI production capacity to 360,000 t/y by the end of 2020.
We estimate that Indonesia's first-half primary nickel production jumped by 50% year over year to 264,000 tonnes. The latest Global Trade Tracker data shows that Indonesia's exports of value-added products such as NPI and ferronickel have surged accordingly, by a massive 125% year over year to over 900,000 tonnes in the first four months.
We expect Indonesia's primary nickel production to jump by 46% year over year to 550,000 tonnes in 2020. Risks nevertheless remain that the COVID-19 pandemic — which has caused nearly 4,320 deaths in the country at the time of writing — could result in more stringent lockdown measures. This could delay development of the country's NPI projects and support nickel prices.
Net economic impact of Indonesia's ore export ban will depend on policy certainty – S&P Global Economics
While commodities are important to the Indonesian economy, nickel and related ores are still a small component of the sector. Key commodity exports include coal, natural gas and crude oil, which account for about 7% of the economy by value-added and about 21% of all exports. Nickel and other ore exports make up about 5% of total exports, and in 2019, extraction and downstream base metals fabrication together comprised a modest 3.3% of the economy. With extraction's share of the economy gradually declining, policymakers have identified a need to boost growth in higher value-added base metals production.
Policies intended to add value to nickel mining, such as the nickel ore export ban, have caused some firms to invest in smelting capacity, as previously discussed. In addition to the law supporting domestic nickel ore prices, another new law, passed in May, encourages downstream facility development by making it easier for firms with smelting capacity to extend mining licenses. The government has also listed smelters among its national strategic projects.
Despite the push to expand value-added nickel production capacity, firms considering investment in value-added expansions need more policy clarity before committing to expensive new projects. Policy uncertainty remains a key obstacle for attracting foreign investment into the country, and issues around logistics, labor markets and services efficiency mean higher operating costs for Indonesian firms.
S&P Global Economics expects policy uncertainties to remain on the horizon. Firms and observers have, for example, cited uncertainty around divestment regulations as a key risk to investment in capital-intensive base metals production. The long-term economic success of initiatives to expand downstream processing will depend on commercial viability and a conducive investment environment.
Surging Indonesian output to contribute to 1st primary nickel market surplus since 2015 this year
While there is some uncertainty around the ore ban's future impact on Indonesia's economy, its impact on the global primary nickel market is clearer. The ban is likely to extend the expansion of Indonesia's value-added nickel production capacity beyond 2020. We expect the country's primary nickel output to increase from an expected 550,000 tonnes this year to 930,000 tonnes by 2024, overtaking China as the world's leading primary nickel producer next year. The country also aims to increase production of stainless steel and battery-grade nickel products to meet rising electric vehicle demand. In January, the government-approved environmental impact studies for proposed factories producing battery-grade nickel chemicals in the Morowali Regency in Central Sulawesi Province. The approvals allow investors like Tsingshan to continue construction of their high-pressure acid leaching plants in the region.
In contrast, we expect the ban to negatively impact 2020 output from the Chinese NPI sector — the main consumer of Indonesian nickel laterite ore. Without Indonesia, China's NPI industry currently sources most of its nickel laterite ore feedstock from the Philippines. The Philippines' ability to ramp up nickel ore exports to offset Indonesia's export ban will be limited, however — primarily by environmental restrictions on increasing output and mining suspensions due to the pandemic. The latter have contributed to Philippine nickel ore exports to China falling by 27% year over year to 5.6 Mt in the first five months. We, therefore, forecast a 21% drop year over year in China's full-year primary nickel output to 575,000 tonnes.
We also expect higher Indonesian primary nickel output to offset lower Chinese output this year. In the absence of sufficient primary demand due to COVID-19, higher Indonesian production will not be absorbed. We, therefore, forecast the global primary nickel market to move to a 100,000-tonne surplus in 2020 — the market's first primary surplus since 2015 — compared with a 33,000-tonne deficit in 2019. We expect this significant surplus to lower the average price by 7% year over year to US$12,990/t in 2020.
Downside risks to our 2020 forecast remain, such as the possibility of a second peak in COVID-19 infections, as predicted by the World Health Organization. S&P Global Economics expects the economic recovery from the pandemic to be longer and more complicated than the downturn. Nickel prices could find some upside support, however, if economic activity returns to normal levels and pent-up demand is released at a faster pace than currently expected.
In the long term, global primary nickel market fundamentals will depend heavily on the degree of uncertainty surrounding Indonesian mining policy and whether the country's nickel producers' smelting expansions can remain viable in light of the large amount of investment that these projects require.
Further analysis of the global nickel market can be found in the July edition of the Nickel Commodity Briefing Service.
S&P Global Economics' Vishrut Rana and S&P Global Ratings' Xavier Jean contributed to this article. All companies are owned by S&P Global Inc.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.