This week, the market heard some words of wisdom from Norilsk Nickel’s vice president Pavel Fedorov.
Very unusual for a metals producer, instead of talking up the market, Fedorov gave a very candid assessment, reported by the Financial Times, of metal markets in general and the nickel market in particular.
Until producers begin to behave rationally, he said, prices will remain depressed for the foreseeable future. Pointing to the state of demand in the world’s largest nickel consumer, China, Fedorov said about a third of current Chinese stainless steel capacity was unsustainable due to a slowdown in real estate demand.
Macquarie Bank is quoted as saying Chinese stainless steel demand is likely to fall a further 7% in the first quarter of this year from the same period a year earlier, and that demand is not going to come back.
No Shutdowns Yet
The only rational reaction to reduced demand is to cut supply, if producers want prices to recover, which will bring with it profitability and a return for shareholders. In part, producers are recognizing this new reality and assets are being written down.
Glencore (LON:GLEN) wrote down its nickel assets last year, contributing to a $5 billion loss. In spite of writedowns, Glencore and fellow Australian miner BHP Billiton (LON:BLT) have said no more than they “may” close capacity at Murrin Murrin and Nickel West, respectively, even though they are losing money at current prices.
Yet Norilsk is Still Profitable
Indeed, Norilsk’s comments are all the more interesting because the company is not suffering losses as a result of the low prices, just loss of better profits. The world’s largest miner has a cost of production currently below $8,630 per metric ton price levels, aided and abetted by co-mined minerals and the depreciation of the Russian ruble.
Almost in provocation, Fedorov is quoted as saying that due to the value of its Talnakh deposit in the Russian Arctic — which contains some of the world’s largest concentrations of platinum, palladium, gold, copper and silver — the company could “theoretically stockpile nickel and still make money.”
Betting on the long term, Norilsk is moving ahead with the development of new projects despite current prices. Last year it is said to have sold a 13.3% stake in its Bystrinsky copper mine in Siberia near the Chinese border to a group of Chinese private equity and other investors. The project is expected to cost $1 billion, the company has said. That’s before it starts production in 2017, adding pressure to the 70% of global capacity that, in Norilsk’s estimation, is losing money at current prices.
Nickel is not an isolated case. Across the metals spectrum there are plenty of examples of oversupply where prices are depressed and unlikely to recover in the face of weaker demand and excess supply. We are into a new normal, but many producers are unable or unwilling to face up to the the implications.