The nickel market outlook: from over-supply to

shortage?
h t
?
April 2014
Jim Lennon

C
Consultant
l
to Macquarie
M
i Research
R
h
jim.lennon@macquarie.com

In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the
reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

Nickel: from worst to best

The January 12th absolute ban on exports of nickel ore from Indonesia changes
everything in the nickel market.
market
From being the worst performing metal in recent years, nickel has the potential to be the
best performing metal in 2014-16.
The export ban removes up to 450kt of ferronickel/nickel pig iron production from the
market, equal to 25% of 2013 global nickel use in the short run (next two years at least),
there are limited substitutes for this nickel.
Impact on the market is delayed by large stocks of nickel ore in China and elsewhere of
around 250-300kt nickel and of course large refined stocks on LME and in China.
o e e , these
ese sstocks
oc s will rapidly
ap d y deplete
dep e e in 2014/5
0 /5 and,
a d, more
o e importantly,
po a y, those
ose
However,
controlling those stocks will hold on to them more tightly if they think prices will rise.
Once stocks are depleted, it is a mystery where supply will come from! This is a repeat of
the situation leading up to 2006/7.
Page 2

Nickel: the Indonesian supply flood has been stopped

Huge requirements for new capacity driven by explosion in Chinese demand since 2000.

Chinese demand remains strong and demand outlook is bright.

Nickel
Ni k l shortage
h t
up tto 2006/07 but
b t th
then:
1.

Growth in 200-series stainless steel (1-2% Ni) as a substitute for 300-series (8-9% Ni).

2.

Processing
g of low-grade
g
laterite nickel ores into nickel pig
p g iron in China.

3.

$40bn+ spent by the nickel industry to expand production.

Nickel market moved into large structural over-supply.

however:
Soaring capex and major technical challenges have made non-Chinese investments
economically unviable.
Chinese NPI (nickel pig iron) was a low-capex/high opex solution to meeting demand
growth; however, China has limited mine reserves of nickel so it is highly reliant on raw
material imports, especially from Indonesia.
Indonesia has banned exports of unprocessed mineral products from 2014. There is no
substitute for Indonesian ore.
Page 3

LME nickel price rallies 25% from January 2014 low

300000
275000

18000

250000
17000

225000

16000

200000
175000

15000

150000
14000

125000

LME price
Source: LME, Macquarie Research, April 2014

Page 4

LME stocks

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

100000
Jul-12

13000

LME
E stocks: ton
nnes

LME
E cash price: $/t

19000

Nickel
c e sstocks
oc s a
are
e higher
g e than
a for
o a
anyy o
other
e base
metalbut control of these stocks is the key
30

27.4

Estimated total stocks for base metals: end-Feb 2014

(weeks of annual consumption)
28.5

Current nickel stocks

30

25

900

25

Other
Exchange

20

8.3

10

8.2
6.2

0
Al

Ni

Zn

Cu

Sn

Source: LME, INSG, ICSG, ILZSG, IAI, COmex, SHFEMacquarie Research, April 2014

Page 5

Pb

Reported
Producer
Non-LME ExChina
LME

700
'000t Ni

15

13.0

10

China SRB (e)

800

20
15

China other

1000

Raw Materials

600
500
400
300

Non-China in
raw materials
China in raw
materials

200
100
0
End-Feb 2014

C ese nickel
Chinese
c e ore
o e stocks
s oc s starting
s a g to
o fall,
a , bu
but who
o
owns it and when will it be used?
End-2013
End 2013 estimated ore stocks close to
35mt, of which 25mt of high-grade
Indonesian nickel ore.

Estimated Chinese nickel ore stocks

35000

Ni content of stocks probably close to

300kt, around 7-7.5 months.

30000

'000t gross weight

25000

However, many nickel pig iron producers

only have 1-3 months holdings with
traders and large producers controlling
the bulk of stocks.

20000
15000
10000
5000
0
Jan12

Mar- May12
12

Jul12

Sep12

Nov12

Jan13

Port

Mar- May13
13

Plant

Jul13

Sep13

Nov13

Jan14

Mar14

Cuts to nickel pig iron production likely to

start soon.

Source: Umetal, Macquarie Research, April 2014

Page 6

Ore prices critical in costs starting to soar and

sellers of ore socks likely to delay sales
Quotes for nickel ore exports
p
move sharply
p y higher
g
70
65
60

$/t fob
$

55
50
45
40
35
30
25

Philippine 1.8%Ni
1 8%Ni ore
Source: SMM, Macquarie Research, April 2014

Page 7

Indonesia 1.8%Ni
1 8%Ni ore

Feb-14

Nov-13

Aug-13

May-13

Feb-13

Nov-12

Aug-12

May-12

Feb-12

Nov-11

Aug-11

May-11

Feb-11

Nov-10

Aug-10

May-10

Feb-10

20

LME longs
o gs soa
soar and
a d rising
s g cancelled
ca ce ed warrants
a a s make
a e
stocks harder to obtain
LME cancelled warants as percent of total LME stocks

Huge rise in LME open interest points to large spec longs

2000000

19000

50%

40%
17000
Price: $
$/tonne

LME future open interest: tonnes

45%
1750000

1500000

1250000
15000

35%
30%
25%
20%
15%

1000000

10%

Source: LME, Macquarie Research, April 2014

Page 8

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

LME price

Mar-13

0%
Feb-13

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

5%

Jan-13

Open interest

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

13000

Jan-13

750000

Projected market balance if the ban is enforced

'000t supp
ply/demand ba
alance

2003-07: 141kt
deficit

200
150

12
186

2014-18f:
462kt
deficit

136

122
93

100
48
50

8
6

36

32

10

10

0
-26

-50

-40

-12

-33

-100

-88
-111

-150

-117

-100

-2

145
-145

B l
Balance
(LHS)

St k iin weeks
Stocks
k off use (RHS)

Source: INGS, Macquarie Research, April 2014

Page 9

2018f

2017f

2016f

2015f

2014f

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

-4

2001

-200

LME/prducers
L
s stocks in we
eek's use

2008-13:
2008
13 540kt
surplus

250

2013 prices well into cost curve worst since early1980s

Nickel industry costs and LME price
40 000
40,000

Costs and prices ($/ton

nne Ni)

35,000
30,000
25,000
20,000
15,000
10,000
5,000

9th Decile

Upper quartile

Median

Lower quartile

Source: Wood Mackenzie, LME, Macquarie Research, April 2014

Page 10

LME Price

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

The Indonesian ban

From January 12,
12 2014,
2014 exports of unprocessed nickel products (Ni content
<4%) banned in line with 2009 Indonesian Mining Act.
Macquarie had expected a partial ban with companies building plants being
granted export licence extensions this was rejected by Indonesian Parliament.
No sign of a change, although Parliamentary elections in April 2014 and
Presidential election in July 2014 may change personnel and policy we,
however, see this as unlikely, especially as plans to build processing plants
come to fruition.

Incredible
c ed b e g
growth
o
in Indonesian
do es a nickel
c e ore
oe
outputmainly destined to China
Indonesian apparent nickel ore production ('000t Ni)
40%

700
30%

500

617

400

20%
338

300
200
100

51

62

403
10%

134
71

Page 12

2013
2

2012
2

2011
2

2010
2

2009
2

2008
2

2007
2

2006
2

2005
2

2004
2

2003
2

2002
2

2001
2

0%

Source: INSG, Indonesian trade statistics, Macquarie Research, April 2014

Ore to Europe
Ore to Australia
Ore to Japan
Aneka Tambang
PT Vale
% of world finished
nickel production

0
2000
2

'000t N
Ni

600

Ore to China

% of world prroduction

800

More
o e than
a half
a o
of C
Chinese
ese nickel
c e p
production
oduc o from
o
Indonesian nickel ore!
Split of Chinese nickel production
800

714

700

700
541

'0
000t Ni

600
400

315

300
100

102
0

134
5

187
16

216
35

254
43

600
409

445

500

200

800

256

500
400

177

300

67

200
100

2005

2006

2007

2008

2009

2010

2011

2012

Conventional - Jinchuan

Conventional - Other

NPI from Philippines ore

NPI from Indonesian ore

Source: INSG, CNIA, SMM, Macquarie Research, April 2014

Page 13

2013

The changing face of nickel stagnation in sulphide

production as laterites take off mine production basis
World laterite nickel mine production by country

World sulphide nickel mine production by country

Indonesia

1600

Philippines

900

Turkey

1400

China

800

Myanmar
Canada

700

Ukraine
Albania

Russia

600

Papua New Guinea

1000

USA

500

Zambia

400

Finland

Zimbabwe

'000tt Ni

'000t N
NI

1200

Australia

Venezuela

800

Serbia
Russia

600

Brazil

300

Madagascar

Dominican Rep.

Botswana

200

Guatemala

400

S.Africa

Macedonia

China, P.R.

Australia

200

100

Cuba
Colombia

Source: INSG, Macquarie Research, April 2014

Page 14

2013
2

2012
2

2011
2

2010
2

2009
2

2008
2

2007
2

2006
2

2005
2

2004
2

2003
2

2002
2

2001
2

Brazil
2000
2

2013
2

2012
2

2011
2

2010
2

2009
2

2008
2

2007
2

2006
2

2005
2

2004
2

2003
2

2002
2

2001
2

2000
2

N.Caledonia
Greece

Indonesian nickel exports: incredible growth

Indonesian exports of nickel ore
70
60

2005
2006
2007
2008
2009
2010
2011
2012
2013
2013 % share

China (+HK) Australia Greece Japan Ukraine Others

0.07
0.95
0.10
2.03
0.49
0.06
0.66
0.71
0.15
2.07
0.73
0.08
5 43
5.43
0 37
0.37
0 39
0.39
1 85
1.85
0 59
0.59
0 39
0.39
6.59
0.51
0.35
1.83
1.01
0.31
7.88
0.00
0.39
1.46
0.58
0.12
14.35
0.84
0.24
1.45
0.63
0.21
36.23
0.96
0.57
1.86
0.71
0.51
43.54
1.45
0.64
1.55
1.20
0.06
59.17
1.57
0.46
1.98
1.48
0.14
91.3%

2.4%

0.7%

3.1%

2.3%

Total
3.70
4.39
9 03
9.03
10.59
10.44
17.73
40.84
48.45
64.80

% change
YoY
13.6%
18.6%
105 4%
105.4%
17.3%
-1.5%
69.9%
130.4%
18.6%
33.8%

million tonne
es wet basis

Indonesian ore exports (m wmt gross weight)

50
40
30
20
10

0.2% 100.0%

0
2005 2006 2007 2008 2009 2010 2011 2012 2013
China (+HK)

Source: Indonesian trade statistics, Macquarie Research, April 2014

Page 15

Australia

Greece

Japan

Ukraine

Others

Indonesian
do es a nickel
c e ore
o e exports:
e po s massive
ass e growth
go
but
bu
low value add
Reported Indonesian nickel ore exports - mostly but
not just China

Value of Indonesian nickel ore exports

Average fob value of Indonesian nickel ore exports per

tonne fob

1.8

70

70

1.69

64.8

25%
24%

1.6

1.49

60

60

1.43
48.4

50

19%

19%
18%

1.2

17%

16%

40

30

59.2

$US/wm
mt

40.8
$USbn

million tones wett basis

50

18%

1.0

0.8

15%

14%

40
67

30

10%

1.45

0.61
17.7

20

9.0

10

10.6

20
35

6.6

2007

2008

0.2

7.9

0.28

Australia

2009

2010

Japan

Ukraine

2011

2012

Greece

2013

Other

0.0

26

5%

0.35
0.23

0.15

0.03

0%
2006

China

31

10

0.22

5.4

30

27
0.28

14.3

China

1.16

04
0.4

0.7

2006

0.53

0.52

36.2

10.4

4.4
0

0.6

43.5

49

49

1.25

Australia

Japan

Ukraine

Source: Indonesian trade statistics, Macquarie Research, April 2014

Page 16

Greece

Others

2007

2008

Ore/tonne fob

2009

2010

2011

2012

Ni in ore as % of LME price

2013

Ni recpovered as % LME price

20%

1.4

Some room for doubt on actual nickel exports?

Indonesia-China nickel ore trade from both sides

70

60

50
million tonn
nes

million tonne
es

Chinese nickel ore trade with Indonesia

5
4
3

58.6

43.1

40

36.1

30

33.9
25.7

20

14 3
14.3

2
10

41.1

6.6 7.4

7.6 7.2

2008

2009

12.2

1
0
0
2008

2009

2010

2011

Chinese imports

2012

2013

2010

2011

2012

2013

Indonesian exports to China

Chinese imports from Indonesia

Indonesian exports

Source: GTIS, Macquarie Research, April 2014

Since January 2011: total Indonesian exports to China: 138mt; Chinese imports from Indonesia:
101mt = 27% difference implies Chinese reported imports mostly on dry basis?
Page 17

Average
e age C
CFR value
a ue of
o Chinese
C ese imports
po s iss too
oo high
g
relative to actual reported values
Average fob and cfr values in Indonesia-China
Indonesia China nickel ore
trade
140
115

$/tonne a
as reported

120

105

100

88

80
60
40

73

66
44
35

32
20

24

29

25

20
0
2008

2009

Indonesian exports
p

2010

2011

2012

Chinese imports
p
from Indonesia

Source: GTIS, Macquarie Research, April 2014

Page 18

2013

Philippines
pp es mostly
os y not
o recovered
eco e ed as nickel
c e o
ore
e ((iron
o
ore)
1200

30%

Recoverable
R
bl nickel
i k l ore production
d ti
in
i Indonesia,
I d
i
New Caledonia and the Philippines

1000

25%

'000t con
ntained nickel

% of world mine produc

ction

I d
Indonesia
i and
d Philippines
Phili i
share
h
in
i global
l b l mine
i
production
35%

20%
15%
10%
5%

800
755
600
473
400

2007

2008
Indonesia

2009

2010

Philippines

2011

2012

2013

New Caledonia

263
184

200

0%

544

98

195

183

Page 19

98

147

183

63
103

86

125

93

130

128

132

160

2007

2008

2009

2010

2011

2012

2013

New Caledonia

Source: INSG, Dimenc, Trade data and Macquarie Research estimates, April 2014

128

Philippines

Indonesia

What can replace Indonesian ore?

Close to 450kt of Indonesian nickel ore used in 2013 in China, Japan and Europe.
Stockpiles of 250-300kt ore can be used to replace lost imports but traders hold bulk of
the ore stocks
stocks.
Most of Indonesian ores are saprolite ores (1.7-2.0% Ni, 15-20% Fe) used mainly in
electric furnaces to make high-grade (8-12% ni) nickel pig iron (NPI).
Most
M t ore from
f
Philippines
Phili i
are lilimonite
it ores (0
(0.8-1.3%
8 1 3% Ni,
Ni 45-50%
45 50% Fe)
F ) used
d mainly
i l in
i blast
bl t
furnaces to make low-grade (1-4% Ni) NPI or pig iron with no nickel recovery. Potential
for maybe 30-60kt extra high grade/low grade Pilipino ore.
New Caledonia may supply more ore to Japan and Australia but most expansion
committed to SMSP/Posco ferronickel plant in Korea, which is being expanded from
30ktpa to 54ktpa.
Guatemala mine expansion by Solway Group (Skye Resources Fenix project) could
supply 15-20ktpa for Ukraine ferronickel plant to replace Indonesian feed.
No other significant potential nickel ore suppliers to replace Indonesian ore.
Stainless steel scrap and substitution within stainless grades to lower nickel likely.
likely

Supp y iss still

Supply
s coming
co
g from
o new
e projects
p ojec s exe
Chinabut (thankfully) at well below capacity!
000t Ni
VNC (Goro)
Ona Puma
Ravensthorpe
Kevista
Enterprise
Eagle
Koniambo
Talvivarra
Barro Alto
Ambatovy
Taganito
Ramu
Sk e Reso
Skye
Resources
rces
Taguang
Total
YoY change

Process
HPAL
FeNi
HPAL
Conc
Conc
Conc
FeNi
Bioleach
FeNi
HPAL
HPAL
HPAL
FeNi
FeNi

Capacity
57
50
39
11
40
25
60
30
40
60
30
32
20
23
517

Start-up
1Q 11
1Q 11
2H 11
2Q 12
2016
2014
1Q 13
4Q 09
1Q 11
2Q 12
2H 13
2H 12
Late 13
Late-13
1Q 13

Year
2010
0
0
0
0
0
0
0
10
0
0
0
0
0
0
11
11

Year
2011
8
7
6
0
0
0
0
16
6
0
0
0
0
0
43
32

Year
2012
6
6
33
4
0
0
0
13
22
6
0
5
0
0
94
51

Source: Company Reports, Macquarie Research, April 2014

Page 21

Year
2013
15
2
38
9
0
0
1
10
25
25
1
11
0
3
142
48

Year
2014F
30
16
38
10
0
2
23
15
26
43
21
22
3
14
262
121

Change
2011/10
7.4
7.0
57
5.7
0.0
0.0
0.0
0.0
57
5.7
6.3
0.0
0.0
0.0
00
0.0
0.0
32.1

Change
2012/11
-1.9
-1.0
27 2
27.2
3.9
0.0
0.0
0.0
-3.2
32
15.3
5.7
0.0
5.3
00
0.0
0.0
51.3

Change
2013/12
9.6
-4.1
52
5.2
5.1
0.0
0.0
1.4
-2.8
28
3.5
19.5
1.0
6.1
00
0.0
3.1
47.6

Change
2014/13F
14.7
14.1
-0.1
01
1.0
0.0
2.0
21.6
49
4.9
0.9
17.4
20.4
10.6
30
3.0
10.4
120.8

Our supply assumptions by main supplier - finished

'000t finished Ni

2011

2012

2013

2014F

2015F

2016F

2017F

2018F

2019F

2020F

Vale

209

218

231

255

279

290

295

305

315

327

Norilsk Nickel

286

279

276

275

275

277

280

280

280

280

Jinchuan Nickel

127

128

143

128

150

150

150

150

150

150

83

108

115

113

114

112

110

107

107

107

BHP Billiton
QNI

36

37

34

34

30

30

30

30

30

30

106

107

102

114

127

132

142

147

152

152

Anglo American

49

57

51

55

48

71

77

79

80

80

Sumitomo MM

68

70

75

89

92

94

97

102

102

102

Eramett
E
Chinese NPI
Indonesian NPI
Other Chinese

54
282
0
36

56
361
1
52

51
500
2
60

59
375
5
80

63
175
40
90

65
150
100
95

65
150
150
100

65
150
200
100

65
150
250
100

65
150
275
100

Cubaniquel

31

27

22

16

27

28

28

28

28

28

Sherritt

35

34

34

34

36

38

40

40

40

40

Xstrata

Ambatovy
Pamco

25

43

55

60

60

60

60

60

26

38

39

33

39

39

39

39

39

39

Minara/Glencore

30

36

44

44

44

44

44

44

44

44

Aneka Tambang

20

18

19

20

25

35

45

50

50

50

Larco

19

19

18

18

18

18

18

18

18

18

SNNC

17

22

25

29

40

45

50

50

50

50

Votorantim

21

21

23

26

27

27

27

27

27

27

Cunico

33

29

29

29

29

29

29

29

29

29

Others

69

64

58

76

92

107

110

110

110

110

Disruption allowance
Total World
Change t y-o-y
Change % y-o-y

-70

-96

-102

-107

-110

-114

-116

1633
178
12.2%

1788
155
9.5%

1977
189
10.6%

1879
-98
-4.9%

1818
-61
-3.2%

1934
115
6.3%

2029
95
4.9%

2099
70
3.5%

2162
63
3.0%

2197
35
1.6%

Source: Company Reports, Macquarie Research, April 2014

Page 22

Intermediate supply flows little room to

supplement NPI feed sources with sulphides?
'000t ni
L t it
Laterites
Ramu Pal inter.
PT Vale matte
First Quantum Ravensthorpe PAL inter.
Vale VNC PAL inter.
SMM Taganito PAL inter.
New Caledonia Ni in ore
Philipino Ni ore exports
I d
Indonesian
i nii ore
Guatemala ni ore
Sub-total laterites

2014F

2015F

2016F

2017F

2018F

Change
2012/11

15.1
79.4
38.1
6.9
1.0
57.4
160.0
672 0
672.0
8.0
1037.9

22.0
79.5
40.0
8.0
22.0
65.0
200.0
75 0
75.0
12.0
523.5

28.0
85.0
40.0
7.0
30.0
80.0
225.0
00
0.0
15.0
510.0

31.0
90.0
40.0
7.0
30.0
90.0
230.0
00
0.0
15.0
533.0

31.0
90.0
40.0
7.0
32.0
95.0
240.0
00
0.0
15.0
550.0

31.0
90.0
40.0
7.0
35.0
100.0
250.0
00
0.0
15.0
568.0

0.2
-3.3
23.0
-4.3
0.0
5.4
50.0
66 0
66.0
2.4
139.4

14.9
13.2
9.4
3.6
1.0
-9.7
35.0
221 0
221.0
5.6
293.9

6.9
0.1
1.9
1.1
21.0
7.6
40.0
-597.0
597 0
4.0
-514.4

6.0
5.5
0.0
-1.0
8.0
15.0
25.0
-75.0
75 0
3.0
-13.5

3.0
5.0
0.0
0.0
0.0
10.0
5.0
00
0.0
0.0
23.0

0.0
0.0
0.0
0.0
2.0
5.0
10.0
00
0.0
0.0
17.0

0.0
0.0
0.0
0.0
3.0
5.0
10.0
00
0.0
0.0
18.0

1.6
12.2
8.8
11 7
11.7
0.0
19.2
9.6
19.4
9.06
0.0
0.0
26 3
26.3
2.3
0.0
0.0
12.9
19.3
38.1
0.0
190 4
190.4

8.5
6.4
2.8
41
4.1
5.0
23.8
11.6
21.1
9.13
0.0
0.0
26 3
26.3
0.9
1.0
0.0
10.1
15.6
33.2
5.8
185 5
185.5

10.0
4.0
0.0
00
0.0
10.0
24.0
10.0
22.0
9.5
0.0
2.0
26 5
26.5
0.0
7.0
0.0
15.0
16.0
22.0
0.0
178 0
178.0

18.0
8.0
0.0
00
0.0
10.0
24.0
10.0
22.0
9.5
5.0
15.0
27 0
27.0
0.0
7.0
0.0
20.0
16.0
20.0
0.0
211 5
211.5

20.0
12.0
0.0
00
0.0
10.0
24.0
10.0
22.0
9.5
20.0
20.0
27 0
27.0
0.0
7.0
0.0
20.0
16.0
20.0
0.0
237 5
237.5

20.0
12.0
0.0
00
0.0
10.0
24.0
10.0
23.0
10.0
35.0
20.0
28 0
28.0
0.0
10.0
5.0
25.0
16.0
20.0
0.0
268 0
268.0

21.0
12.0
0.0
00
0.0
10.0
24.0
10.0
25.0
11.0
40.0
20.0
30 0
30.0
0.0
12.0
15.0
30.0
16.0
20.0
0.0
296 0
296.0

1.6
2.9
7.0
-5.3
53
0.0
7.6
-0.3
1.0
0.3
0.0
0.0
02
0.2
0.1
0.0
0.0
-3.2
3.9
-14.6
0.0
13
1.3

6.9
-5.8
-5.9
-7.6
76
5.0
4.6
2.0
1.7
0.1
0.0
0.0
00
0.0
-1.4
1.0
0.0
-2.8
-3.6
-4.9
5.8
-5.0
50

1.5
-2.4
-2.8
-4.1
41
5.0
0.2
-1.6
0.9
0.4
0.0
2.0
02
0.2
-0.9
6.0
0.0
4.9
0.4
-11.2
-5.8
-7.5
75

8.0
4.0
0.0
00
0.0
0.0
0.0
0.0
0.0
0.0
5.0
13.0
05
0.5
0.0
0.0
0.0
5.0
0.0
-2.0
0.0
33 5
33.5

2.0
4.0
0.0
00
0.0
0.0
0.0
0.0
0.0
0.0
15.0
5.0
00
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
26 0
26.0

0.0
0.0
0.0
00
0.0
0.0
0.0
0.0
1.0
0.5
15.0
0.0
10
1.0
0.0
3.0
5.0
5.0
0.0
0.0
0.0
30 5
30.5

1.0
0.0
0.0
00
0.0
0.0
0.0
0.0
2.0
1.0
5.0
0.0
20
2.0
0.0
2.0
10.0
5.0
0.0
0.0
0.0
28 0
28.0

934.4

1223.4

701.5

721.5

770.5

818.0

864.0

140.7

289.0

-521.9

20.0

49.0

47.5

46.0

2012

2013

0.0
69.5
5.7
7.7
0.0
61.7
75.0
385 0
385.0
0.0
604.6

0.2
66.2
28.7
3.4
0.0
67.1
125.0
451 0
451.0
2.4
744.0

Sulphides
First Quantum Kevista conc
Norilsk Tati conc
Norilsk Lake Johnson conc
Gl
Glencore
Xstrata
X t t Australia
A t li conc
Bindura Nickel Trojan conc
Norilsk/ARM Nkomati conc
BHP Billiton conc
Panoramic Resources conc
Mincor Resources conc
First Quantum Enterprise conc.
Lundin Eagle conc
W t
Western
Areas
A
conc
Belvedere Resources conc
Asian Mineral Resources Ban Phuc conc
Royal Nickel (Dumont)
Talvivaara conc
Mirabela Nickel conc
BHP Billiton matte
Angloplats matte
S b t t l sulphides
Sub-total
l hid

0.0
9.3
1.7
17 0
17.0
0.0
11.6
9.9
18.4
8.79
0.0
0.0
26 1
26.1
2.2
0.0
0.0
16.1
15.3
52.7
0.0
189 2
189.2

Total

793.7

2011

Source: Company Reports, Macquarie Research, April 2014

Page 23

Change
Change
Change
Change
Change
Change
2013/12 2014/13F 2015/14F 2016/15F 2017/16F 2018/17F

New capacity has high average capital costs

costs
PAL
Murrin Murrin
Coral Bay Stage 1
Ravensthorpe original
VNC (Goro)
Ramu
Ambatovy
Taganito
Total above

Start-up
Start
up
1999
2005
2007
2010
2012
2012
2013

'000tpa
$m
Capacity Capex $/t cap Acid plant Refinery
40 1700 42500
x
x
12
220 18333
40 3000 75000
x
x
60 6000 100000
x
x
32 1800 56250
x
60 5500 91667
x
x
30 1600 53333
222 17900

80631

Ferronickel
Gwangywang
Onca Puma
Barro Alto
Koniambo
Taguang Taung Nickel

Total above

Start-up
Start
up
2008
2011
2011
2013
2013?

'000tpa
$m
Capacity Capex $/t cap
30
720 24000
52 3200 61538
40 1900 47500
60 6300 105000
22
850 38636

204 12970 63578

Source: Company Reports, Macquarie Research, April 2014

Average PAL capital costs = $80,000/tonne of capacity, while ferronickel plants coming
in at close to $65,000/t of capacity.
By contrast, older NPI plants had capacity costs of <$5,000/t of capacity and newer
rotary kiln electric furnace (RKEF) capacity is around $15,000/t of capacity.
400kt+ of RKEF capacity built/under construction in China!
Page 24

O e iss a b
Ore
big
g factor
ac o in C
Chinese
ese NPI cos
costss bu
but the
e
price is not static!
Published Chinese import ore price (1.8% Ni ore from
Indonesia)

Chinese RKEF nickel pig iron cost breakdown

Theoretical for coastal plant

% of total cas
sh costs

15%

140

11%

9%

8%

10%

13%

11%

13%

12%

21%
25%

25%

28%

31%

59%

52%

54%

40%

50%

30%
28%

120

26%
100

24%
22%

80

20%
60

18%
16%

40

14%
20

0%
2009

2010

2011
Ni ore

Electricity

2012
Carbon

0
2009

2013 YTD

12%
10%
2010

2011
Ore price

Other

Source: SMM, Macquarie Research, April 2014

Page 25

2012
Ni in ore as % LME

2013

Ni content as % of LME

14%

$/tonne cfr China (ex-VAT)

100%

18000

16000

14000
$/tonn
ne ex-VAT

24000
24000

22000
22000

20000
20000

12000

Price: 8-13% NPI

Costs: 10% Ni - Coastal

Costs: 10% Ni - Inner Mongolia

Source: SMM, Mysteel, Macquarie Research, April 2014

Page 26
Jan-10
0
Mar-10
0
May-10
0
Jul-10
0
Sep-10
0
Nov-10
0
Jan-11
1
Mar-11
1
May-11
1
Jul-11
Sep-11
1
Nov-11
2
Jan-12
Mar-12
2
May-12
2
Jul-12
2
Sep-12
2
Nov-12
2
Jan-13
3
Mar-13
3
May-13
3
Jul-13
3
Sep-13
3
Nov-13
3
Jan-14
4
Mar-14
4

Jan-10
0
Mar-10
0
May-10
0
Jul-10
0
Sep-10
0
Nov-10
0
Jan-11
1
Mar-11
1
May-11
1
Jul-11
1
Sep-11
1
Nov-11
1
Jan-12
2
Mar-12
2
May-12
2
Jul-12
2
Sep-12
2
Nov-12
2
Jan-13
3
Mar-13
3
May-13
3
Jul-13
3
Sep-13
3
Nov-13
3
Jan-14
4
Mar-14
4

$/tonne ex-VAtt

NPI cos
costss o
on their
e way
ay up us
using
g spot
spo quotes
quo es for
o
ore

18000

16000

14000

12000

Price: 8-13% NPI

Costs: 12% Ni - RKEF

Costs: 12% Ni - Conventional

LME ou
outperforms
pe o s Chinese
C ese domestic
do es c pricing
p c g too
oo
much finished stock in China?
Price premiums and discounts in China
Pric
ce: $US/tonne Ni e
ex-VAT

Price: $
$US/tonne Ni ex--VAT

Chinese and non-Chinese nickel prices

8
18000

16000

1000
500
0
-500
-1000
1000
-1500

14000

-2000
-2500

8-13% Ni - LME price

Source: LME, SMM, CRU, Macquarie Research, April 2014

Page 27

LME minus Jinchuan metal price

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-14

Apr-13

Jinchuan metal price

Mar-13

Ni in SS scrap (EU/US) inc Fe

Feb-13

8-13% Ni electric furnace NPI

-3000
Jan-13

LME cash price

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

12000

Indonesia verses Chinese NPI plants?

Ore costs substantially lower if plants built at mines (barging costs in Indonesia are high).
Labour costs are higher
g
in Indonesia ((2-3x)) and skilled workers hard to get.
g
Power costs might be comparable, if power was available (need to build power plants).
Chinese efficiencies may not be readily transferrable to Indonesia?
Ancillary costs and engineering services substantially higher in Indonesia.
New RKEF plants in China are at/near stainless plants enabling hot metal transfer.
Capital costs would be substantially higher than in China (3x higher?):
1.

In China, infrastructure such as ports, rail, power, engineering services, etc are already in
place (essentially free to a new producer).

2.

Chinese experience in building overseas (e.g., Ramu in Indonesia, Sino Iron in Australia)
shows low-cost and quick build Chinese model is easily not transferable off-shore.

3.

If Chinese investors,, law requires

q
foreign
g equity
q y share to g
go below 50% after start-up.
p

Chinese NPI cant be exported: 17% non-refundable VAT and 25% export tax
Page 28

The economics of NPI is p

phenomenal compared
p
to
conventional processes at current ore prices
The "economics"
economics of new capacity - based on today
today's
s parameters
90000

80000

80000
65000

70000

$
$/tonne

60000
45000

50000
40000
30000
20000

27000
21375
13000

1700017875 15000
15125
12500

10000

19375
11500

5000

10000
0
PAL (recent)

FeNi (recent)
Capex

Old NPI
Opex

New NPI (RKEF) Indonesian NPI?

Incentive price

This is a very rough guide to the economics of new capacity

Source: Company data, Wood Mackenzie, Macquarie Research, April 2014

Page 29

How
o much
uc would
ou d it cost
cos to
o build
bu d capacity
capac y in
Indonesia and is it likely?
Until the first plant is built
built, capex and timing are speculative but $15bn+
investment would be needed to replace existing Chinese NPI capacity.
By comparison, reported 2013 Indonesian nickel ore exports of 48mt generated
revenue of $1.7bn
$
(and probably profits of less than $0.5bn).
$
Unrealistic to expect such a large investments to be made quickly. First plant
(Tsingshan) not likely to start before mid
mid-2015
2015.
Even if willing, it would take many years to realise (5 years+ from now?).

It is tempting to say that raising revenue from 20% of LME price to

80-90% of price is good for the countrybut ONLY if it is
profitable to do so!
Page 30

Big
g falls
a s in C
Chinese
ese nickel
c e p
pig
g iron
o p
production
oduc o in 2H
2014; nickel market in 1H surplus, 2H deficit

132

145
130

112 111

65

Q4
414F

Q3
314F

Q2
214F

Q114F

Q413
Q

Q313
Q

Q213
Q

Q113
Q

75

Q412
Q

Q212
Q

Q112
Q

Q411
Q

Q311
Q

Q312
Q

79

73 75 69
65

Source: SMM, Macquarie Research, April 2014

105

95

93 94

Q211
Q

160
140
120
100
80
60
40
20
0

Q111
Q

'000t Ni

Estimated and projected Chinese NPI

production

We assume some Indonesian NPIbut not so soon

Nickel pig iron production

600

600
502

500

400

380

362

400
'000t Ni

500

300

282
215

200

159
71

100

87

400

350

300

425

40

250
100

150

200

250

275

300
200

106
100

20

China: 0.5-2%Ni BF

China 4-8%Ni BF

China: 9-15%Ni RKEF

Indonesia

Source: SMM, Macquarie Research, April 2014

Page 32

China: 9-10%Ni old EF

2020F

2019F

2018F

2017F

2016F

2015F

2014F

2013

2012

2011

2010

2009

2008

2007

2006

0
2005

Nickel use in stainless can change!

Austenitic ratio on world steel production
200+300 series combined

78%

World stainless production share

25%
2

24%
2

26%
2

28
8%

27
7%

30
0%

29
9%

24%
2

26%

24%
2

23%
2

24%
2

24%
2

90%

76%

24%
2

100%

80%
70%

55%

57%

57%

58%

57%

58%

59%

68%

65%

68%

71%

40%

72%

50%
72%

72%

60%

72%

% of to
otal

% of total (20
00+300)

74%

30%

70%

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

Source: INSG, ISSF, Macquarie Research, April 2014

Page 33

15%

14%

17%

20%

20%

2010

2011

2012

2013

12%

2007

2009

9%

2006

300 series (8% Ni)

13%

9%

2005

5%

2003

8%

4%

2002

200 series (1-2% Ni)

2004

4%

2001

66%

4%

0%

2000

10%

68%

2008

20%

400 series (no nickel)

Austenitic ratio depends on price

55000

76%

45000

74%

35000

72%

25000

70%

15000

68%

5000

66%

-5000

Austenitic ratio
Source: LME, ISSF, Macquarie Research, April 2014

Page 34

Nickel price

Price: $/tonne (2013$)

78%

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Austenittic %

Nickel price and world stainless austenitic ratio

Sc ap use peaked
Scrap
pea ed when
e price
p ce was
as high
g in
2006potential for growth as ni price rallies?

400

36%

Ni in purchased scrap

Source: ISSF, Macquarie Research, April 2014

Page 35

Scrap ratio %

Scra rratio %

38%

2013
2

450

2012
2

40%

2011
2

500

2010
2

42%

2009
2

550

2008
2

44%

2007
2

600

2006
2

46%

2005
2

650

2004
2

48%

2003
2

700

2002
2

50%

2001
2

750

2000
2

'000t ni in purrchased scrap

Secondary nickel share in stainless steel

NPI accou
accounted
ed for
o major
ajo sshare
aeo
of nickel
c e used in
China in 2012 replacement for scrap use in ROW
Nickel use ex-China by type

Chinese nickel use by type

17%
Ni in scrap
Ni in scrap
NPI

38%

40%

42%

NPI
FeNi

FeNi
Metal/utility/oxide

Metal/utility/oxide

38%
0%

7%

18%

Source: INSG, Macquarie Research, April 2014

Page 36

C ese stainless
Chinese
s a ess iss grabbing
g abb g market
a e share
s a e from
o
rest of world 4.5mtpa swing since 2003!
Chinese net imports of stainless steel

'000t SS
S products

2500

15%
5%

2000
1500

10%

1000

5%

500
0%

0
-500

-5%

-1000

-10%

-1500

Chinese net imports

China trade as % of non-Chinese demand

Source: GTIS, Macquarie Research, April 2014

Page 37

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

-15%
2000

-2000

% of non-Chiinese deman
nd

20%

3000

Nickel demand in stainless: all about China

Stainless steel production by area ('000t)
Year
Year
'000t
2007
2008
USA
2171
1925
Japan
3885
3567
Europe
8093
7819
Korea
1942
1743
Taiwan
1515
1297
India
2045
1980
China
7108
6787
Other
1438
1208
Total
28196
26325
Total Ex-China
21088
19538

Year
2009
1618
2606
5972
1677
1468
2002
9396
1086
25824
16429

Year
2010
2201
3427
7485
2049
1514
2119
11907
1160
31862
19955

Year
2011
2074
3256
7552
2157
1203
2271
14066
1088
33666
19600

Year
2012
1978
3132
7450
2167
1106
2470
16111
1121
35536
19424

Year
2013
2056
3171
7172
2143
1081
2688
19461
1112
38884
19423

% change yoy
USA
Japan
E
Europe
Korea
India
China
Other
Total
Total Ex-China

-16.0%
-26.9%
-23.6%
23 6%
-3.8%
1.1%
38.4%
-10.1%
-1.9%
-15.9%

36.0%
31.5%
25 3%
25.3%
22.2%
5.9%
26.7%
6.8%
23.4%
21.5%

-5.8%
-5.0%
0 9%
0.9%
5.3%
7.1%
18.1%
-6.1%
5.7%
-1.8%

-4.6%
-3.8%
-1.4%
1 4%
0.5%
8.8%
14.5%
3.0%
5.6%
-0.9%

3.9%
1.2%
-3.7%
3 7%
-1.1%
8.8%
20.8%
-0.8%
9.4%
0.0%

-12.1%
-4.9%
-13.5%
13 5%
-15.4%
14.1%
45.6%
-0.4%
0.5%
-9.0%

-11.3%
-8.2%
-3.4%
3 4%
-10.2%
-3.2%
-4.5%
-16.0%
-6.6%
-7.4%

Source: ISSF, INSG, Macquarie Research, April 2014

Page 38

Change
2007-13
-5%
5%
-18%
-11%
10%
-29%
31%
174%
-23%
38%
-8%

Ou nickel
Our
c e supp
supply/demand
y/de a d balance
ba a ce to
o 2020:
0 0 big
bg
question where will supply come from?
`000t
Total SS production
% Change
300-series SS prod.
% Change
Nickel Consumption
% Change
Use of purchased ni in scrap
% change
Nickel Supply
% Change
(of which NPI)
World Market Balance
LME/Producer stocks
Weeks' world demand
LME Cash Price (cents/lb)
LME Cash
C h Price
P i ($/tonne)
($/t
)
LME Cash Price ($/tonne) - 2013$

2012
35536
5.6%
20037
4.1%
1652
3.5%
650
-0.5%

2013
38884
9.4%
21602
7.8%
1790
8.4%
660
1.6%

2014f
41431
6.6%
23234
7.6%
1891
5.6%
707
7.1%

2015f
43925
6.0%
24596
5.9%
1963
3.8%
758
7.2%

2016f
46741
6.4%
26117
6.2%
2050
4.5%
806
6.3%

2017f
49168
5.2%
27328
4.6%
2117
3.3%
846
5.0%

2018f
51258
4.2%
28815
5.4%
2199
3.9%
888
5.0%

2019f
53531
4.4%
30441
5.6%
2288
4.0%
934
5.2%

2020f
55848
4.3%
32262
6.0%
2376
3.8%
980
4.9%

1788
9.5%
(362)

1977
10.6%
(502)

1879
-4.9%
(380)

1818
-3.2%
(215)

1934
6.3%
(250)

2029
4.9%
(300)

2099
3.5%
(350)

2162
3.0%
(400)

2197
1.6%
(425)

136

186

-12
12

-145
145

-117
117

-88
88

-100
100

-126
126

-179
179

230
7.1
795
17527
17877

349
9.9
681
15002
15002

193
5.0
794
17500
16657

76
1.9
907
20000
18572

-113
-2.6
1089
23999
21212

-239
-5.3
1179
26000
22420

-418
-9.0
1270
26151
22000

337
9.1
726
16001
15611

Source: INSG, LME, Macquarie Research, April 2014

Page 39

-12
-0.3
998
22000
19931

Important disclosures:
Recommendation definitions

Volatility index definition*

Macquarie - Australia/New Zealand

This is calculated from the volatility of historic price

movements.

Outperform return > 3% in excess of benchmark return

Neutral return within 3% of benchmark return
Underperform return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12
month forward market dividend yield
Macquarie Asia/Europe
Outperform expected return >+10%
Neutral expected return from -10% to +10%
Underperform expected <-10%

Very highhighest risk Stock should be expected to

move up or down 60-100% in a year investors should
be aware this stock is highly speculative.
High stock should be expected to move up or down at
lleastt 40-60%
40 60% in
i a year investors
i
t
should
h ld b
be aware thi
this
stock could be speculative.
Medium stock should be expected to move up or
down at least 30-40% in a year.
Lowmedium stock should be expected to move up or
down at least 25-30% in a year.

Macquarie First South - South Africa

Outperform return > 10% in excess of benchmark return
Neutral return within 10% of benchmark return
Underperform return > 10% below benchmark return

Low stock should be expected to move up or down at

least 15-25% in a year.

Macquarie - Canada

* Applicable to Australian/NZ stocks only

Outperform return > 5% in excess of benchmark return

Neutral return within 5% of benchmark return
Underperform return > 5% below benchmark return

Recommendation 12 months

Financial definitions
All "Adjusted"
Adjusted data items have had the following adjustments
made:
Added back: goodwill amortisation, provision for catastrophe
reserves, IFRS derivatives & hedging, IFRS impairments & IFRS
interest expense
Excluded: non recurring items, asset revals, property revals,
appraisal value uplift,
uplift preference dividends & minority interests
EPS = adjusted net profit /efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average total
assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average number of
shares
All Reported numbers for Australian/NZ listed stocks are
modelled under IFRS (International Financial Reporting
Standards).

Note: Quant recommendations may differ from

Fundamental Analyst recommendations

Macquarie - USA
Outperform return > 5% in excess of benchmark return
Neutral return within 5% of benchmark return
Underperform return > 5% below benchmark return

Recommendation proportions For quarter ending 31 March 2014

Outperform
Neutral
Underperform

AU/NZ
51.32%
34.54%
14.14%

Asia
60.23%
24.97%
14.80%

RSA
41.25%
40.00%
18.75%

USA
40.21%
53.19%
6.60%

CA
58.52%
35.56%
5.92%

EUR
48.74%
32.77%
18.49%

(for US coverage by MCUSA, 8.21% of stocks covered are investment banking clients)
(for US coverage by MCUSA, 6.67% of stocks covered are investment banking clients)
(for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

Page 40

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Page 42