LME nickel’s recent spike to US$ 18,600 per tonne was not expected by many, including the writer of this report. Two months ago, when the nickel price had risen swiftly from around US$ 12,000 per tonne to some US$ 15,000, I did not think this would last. However, upward price swings have followed since then, passing US$ 18,000 per tonne, and we are still facing a price of around US$ 17,000 at the time of writing.
Despite the strong increases in LME nickel over recent months, stainless steel scrap prices have risen comparatively little. Scrap prices for the 304 grade, for example, achieved a maximum increase of US$ 100-150 per tonne over the period from when LME nickel was attracting around US$ 12,000 to when it was peaking above US$ 18,000. Historically, an increase of some US$ 6000 per tonne in the LME nickel price would equate to a gain of US$ 350-450 for 304 scrap. So what’s happening?
Firstly, only an estimated 3% of LME transactions are physical whereas the remaining 97% are paper transactions, mostly effected by speculators and algorithms. But this is not new; this has been the case with LME prices for decades. So what is different now?
Chinese demand for stainless steel scrap was the reason why scrap prices skyrocketed prior to the financial crisis of 2008. And I believe China’s subsequent preference for cheaper NPI over stainless steel scrap, coupled with a massive increase in Chinese stainless steel production, is why stainless steel scrap prices are now relatively depressed.
Chinese production of stainless steel, especially in Indonesia, has increased substantially, especially these past 18 months. Normally, an increase in stainless steel production would mean higher demand for nickel and stainless scrap but, instead, the Chinese increase has mainly been at the expense of other stainless producers through the taking of market share. And given that Chinese stainless steel is produced largely with NPI rather than the scrap consumed by other mills, this ultimately results in less demand for stainless scrap.
More importantly, as non-Chinese stainless steel producers must compete with low-priced Chinese product made using low-cost NPI, other stainless mills are now pricing nickel in stainless steel scrap similar to the nickel price of NPI rather than benchmarked with the LME nickel price (or benchmarked with substantial discounts to LME nickel, approximating the NPI price).
This is not a valid approach, however, as comparing NPI with stainless steel scrap is like comparing apples with oranges. Not only is production of stainless steel using scrap far more clean and environmentally friendly compared to production using NPI, but also most non-Chinese mills take more time and energy to melt NPI when compared to melting scrap. So even putting environmental pluses aside, there are still financial advantages for many mills to produce stainless steel with scrap rather than NPI. Although pricing nickel in scrap against very speculative LME nickel is not the best answer, pricing nickel in scrap similar to NPI is also not correct.
With China no longer the market leader on the world stage in terms of stainless steel scrap, Indian stainless steel producers have taken their place. Although Indian demand for stainless scrap has decreased over the past two months owing mainly to the availability of cheaper Chinese stainless products and lower global demand for stainless steel in general, total stainless steel and nickel-bearing scrap imports so far this year are still greater than for the same period last year. When comparing data for the months of April, May, June and July, for example, 304 scrap import volumes increased by around 50% compared to the same four-month period in 2018 while the import increases for the 316 grades and high-nickel scrap were, respectively, almost 75% and more than 250%.
As India depends mainly on imported scrap for its stainless steel production, and with continually increasing domestic consumption of stainless steel by the country’s billion-plus population, India will continue to be one of the most important markets - comparatively speaking - for stainless steel scrap, albeit with pricing perhaps decoupled from the LME.
