The Changing Pattern and Outlook for Nickel Use in China
by Dr. Ivor Kirman, President, Nickel Institute
Presented at the "CRU 7th World Stainless Steel Conference" in Paris, 20th September 2004 and at the "China Nickel Outlook 2004" conference in Shanghai, China, May 21, 2004. (Reproduced here with permission from the conference orgainizers.)
Earlier this year, I made a similar presentation to this in Shanghai. At that time, it was apparent that the normally civilised dialogue between nickel sellers and nickel buyers was becoming highly emotional. Nickel prices had run up at a speed and to heights that were unknown to anyone whose experience did not go back to the nineteen eighties.
The emotion that is always associated with such events was amplified by the willingness of third parties to attribute blame - the usual scapegoats being hedge funds and the LME. Other analysts were either throwing fuel on the flames by talk of an upcoming acute shortage of nickel, or throwing cold water on them by talk of large-scale substitution of nickel in stainless steel. Volatility was seen as a specific feature of nickel, rather than a reflection of wider economic change and uncertainty.
Since then I perceive that the emotion associated specifically with nickel has decreased, hopefully to be replaced by careful, cool analysis. That is not to say that the apparent ideal of stability is here. We continue to live in, or be cursed by, changing times.
What has changed?
Firstly, nickel prices have traded in a much narrower range than was seen in the previous six months, and in a very much narrower range than forecast by some of the more extreme analysts. True the price is higher than it has been in recent years, but the month-to-month variation has decreased.
Incidentally, the much-vilified LME has offered a route for anyone who is seriously concerned about locking in a firm nickel price forward for several months or even years. Forward LME nickel prices have been both less volatile than spot prices and, for the last year or more, lower than them. It could be said that the LME has effectively been offering an incentive for forward price commitment.
Secondly, it has become clear that volatility and high prices are not a unique characteristic of nickel prices but are becoming increasingly common in all industrial raw materials. In a recent editorial, the Metal Bulletin referred to the "virus of volatility that has infected global commodity markets". The editorial was stimulated by the very sharp price rises of iron scrap that have been seen in recent months, with prices for many grades reported as more than doubling over a nine-period and increasing of 25-60% over two months. No doubt emotion is high in steel scrap buying and selling circles. No doubt someone is being blamed. But this time it will be difficult to put the finger on hedge funds and the LME.
High prices and volatility are mostly attributable to the far-reaching changes taking place in the structure of the global economy, especially in its manufacturing sector, and especially associated with the dramatic industrial developments in China and India. It is very exciting to see the economic success of these economies. It is, on balance, excellent for their large populations. It is, on balance, excellent for the raw material supplying industry worldwide. It may not be so good for some parts of the established manufacturing industry in the EU, North America and Japan.
Major new raw materials-using capacity is coming on stream, with plans for much more. New supply chains have to be established, with implications for distribution, shipping and warehousing systems. The filling of new supply chains always distorts and confuses otherwise transparent commodity market systems - just as the winding up of defunct supply chains can give rise to opposite distortions.
Turning to China. I am not a China expert. Nor do I intend to present a highly detailed analysis of nickel supply and demand in China. Instead I want to discuss some aspects of the pattern of nickel use in China and to offer some thoughts on the future trend. Finally I will touch upon the delicate and sometimes controversial subject of price-related substitution.
For reasons that I hope will become obvious, my talk has the sub-title: "Is China Different?"
Nickel use patterns outside China
First let's look at nickel use patterns outside of China.
First use of nickel is dominated by stainless steel (60%), but with important volumes being used in nickel-based alloys (11%), plating (10%), alloy steels (8%), foundry (3%), copper alloys (2%). The balance (6%) is a wide range of different first uses.
End use is very diverse. Nickel is used in hundreds of different applications in all sectors of economic activity - infrastructure, capital investment and consumer goods. For convenience, these uses can be grouped into major end use sectors - engineering, transport, electrical and electronic, building and construction, metal good, tubular products. No single sector dominates nickel use. And no single end use accounts for more than two or three percent of total nickel use.
This diversity of use reflects nickel's role as the great enabler - conferring valuable improvements of properties as varied as corrosion resistance, toughness, strength at various operating temperatures. Nickel also enables the production of vital products with special properties - magnetic, electronic, controlled expansion, catalytic and battery-related.
Nickel use has been highly innovative, with added value more than compensating for the relatively high cost of nickel. Continuous innovation has underpinned the long term trend growth rate of global nickel use, which at 4% per annum exceeds global GDP growth rate. The accumulated knowledge base related to the use of nickel provides a formidable platform on which future innovation can be based. With this proven track record of innovation, nickel can play an even more important role in future society than it does today.
Today, nickel products play key roles in all developed and developing economies. They enable efficient telecommunications, safe transportation, effective oil and gas production, clean and reliable energy generation, hygienic processing of foods and drinks, safe and reliable medical equipment, water treatment and delivery and various emissions-reducing equipment from gas scrubbers to hybrid vehicles.
- These nickel products are becoming more critical to modern society - including that developing in China.
- All are being used in China today. All will be used more in China tomorrow.
- Most are being produced in China today. All will be produced in China tomorrow.
Expectations for the pattern of nickel use in China
This brings me back to my sub-title - is China different?
If not, then we should expect nickel use in China to develop and show essentially the same pattern as elsewhere in the world.
- We should expect China's authorities to be interested in long life modern infrastructure - energy, telecommunications, water, and hospitals.
- We should expect China's companies to be interested in long life, modern capital equipment for oil and gas, chemicals, food processing, drinks production, construction and commercial catering. Many companies in China already have experience of this equipment through the inward investment associated with Joint Ventures.
- We should expect China's people to be interested in attractive cookware, tableware, plumbing fitments, portable electronics and personal transport. There may be some special cultural influences, but even these may end up acting in nickel's favour. I am told that shiny stainless steel and chromium plating can be associated with good feng shui.
Current use of nickel in China
China's primary nickel use in 2003 is estimated by the INSG to be 125,000 tonnes, up from 43,000 tonnes in 1997.
But primary nickel use is not the full story of nickel use in China. To get the measure of China's current use of nickel, we should include nickel units used as scrap and nickel units used as imported products. I have attempted to do this for 2003:
- As we have seen, primary nickel use in China was 125,000 tonnes.
- According to a paper by ELG earlier this year, Chinese imports of stainless steel scrap in 2003 totalled 154,000T. Assuming average 8% nickel content, these imports contained about 12,000 tonnes of nickel.
But China was also a large net importer of stainless steel semi-finished products - slabs, strip, bar, tubes - imported as raw materials for China's fabrication and manufacturing industries. In 2003, according to the CSSC, semi-finished stainless steel imports were 2.836 million tonnes, representing about 226,000 tonnes of nickel contained, again assuming 8% nickel content.
Adding this in gives a total Chinese use of nickel units in 2003 of 363,000 tonnes, a huge amount of nickel.
- I did the same calculation for 1997 and got a total nickel unit use of about 86,000 tonnes. In other words, on this measure, total nickel unit use in China has quadrupled in five years!
This treatment is likely to overstate the real situation for total nickel unit use. Some of this use was ultimately exported from China as nickel-containing goods - especially as consumer goods and electronics. It also ignores the imports of low nickel stainless steel. But on the other side of the equation, I am told that, as China's domestic demand increases, the percentage of Chinese manufactured goods that are exported is steadily decreasing. And China's rapidly growing imports will also include a lot of capital equipment and other products that contain nickel.
So my assumption for the total use of nickel units within China itself in 2003 is in the order of 300 - 330,000 tonnes.
Nickel unit use will probably continue to increase year on year in 2004 and 2005.
The exact mix between primary nickel, scrap and imported stainless steel will of course change as Chinese stainless production capacity increases. These trade changes will be difficult and will increase confusion, especially if accompanied by speculative or panic-related stocking and destocking activity.
And not just stainless steel
Stainless steel is the big nickel story in China - as it is globally. But nickel use in China is based on more than stainless steel.
In a recent presentation to the INSG, CRU estimated that non-stainless uses of primary nickel in China will grow at over 6% a year between 2003 and 2005, with non-ferrous alloys, plating, alloy steels and batteries all showing strong growth.
What about substitution?
With nickel prices high and Chinese use of nickel on a strong upward trend, this is the question of the moment - will substitution reduce the intensity of nickel use in China?
I do not know the answer, but I do have some thoughts on the factors that need to be taken into consideration.
China has attracted a huge inward investment in recent years - much of it as Joint Ventures. This investment has had a big effect on Chinese manufacturing. A lot of this investment has been strategic rather than opportunistic. So the equipment imported has been latest specification, accompanied by latest know-how support. Many of the products made by these ventures are intended for export under the overseas venture partner's brands and are therefore produced to international quality standards - both in specification and design. These products are also sold in China, feeding the local appetite for high quality goods. This in turn stimulates local producers to invest and raise their game.
For Chinese industry, this interrelation between the export and domestic markets has acted as a virtuous circle. But it also represents a barrier to easy substitution. If quality matters, then potential substitutes must be able to be produced to the same high quality standards as the product being substituted - otherwise neither export customers nor local customers will be satisfied.
- Substitution is never simple. The economics are complicated - not just the economics of first production, but also the economics of downstream companies - fabricators, stockists, retailers. Total replacement is rare so usually substitution results in proliferation of product and an increase in the stock levels required by the supply chain. All of this can add complexity and therefore cost to the final product. Apparent cost savings in first production can easily be lost.
- Reaction of buyers is never simple. Decisions are seldom made on price alone, but include considerations of quality, performance risk and assured service life. If a cheaper substitute gives a shorter life or leads to higher maintenance costs, then it will prove to have been a short sighted purchase.
- A possible example of this might be some Chinese use of 304 stainless steel in external marine environments. Experience elsewhere in the world has led to 316 stainless being used for these conditions. Some of these Chinese materials selection decisions may lead to poor service in future. If so, we must try to ensure that that this is attributed to inappropriate grade selection, rather than being used to damage the wider reputation of stainless steel.
- Part of the Chinese market already uses highly specified products - supported by local Chinese specifications or by international specifications and codes introduced by experienced Joint Venture partners. Here it is likely that material selection will be close to that seen elsewhere in the world, reflecting cumulative experience and risk management.
- Another part of the Chinese market uses less highly specified products but has become used to high quality imported stainless steel as its raw material for manufacturing products for construction, food handling, and high quality consumer goods. Here too there will probably be a tendency to stay with established grades whose physical specifications match the requirements of modern, productive fabrication plants.
- Which leaves us with that part of the Chinese market that is unspecified and more sensitive to initial price than to assured quality. Here, high nickel prices will certainly stimulate some interest in substitutes. Some products will certainly be made in nickel-free or low nickel alloys.
There are reports of this happening in China today with low added value, simple products being increasingly produced in proprietary low nickel stainless steels in place of the well-proven 304 stainless steel.
Price-driven substitution is not new. It is exactly what should happen in a market-driven economy. Scarce resources go preferentially to those for whom the product adds most value. Price is just the mechanism by which such allocation takes place.
How much? How long?
How price-driven substitution will occur, and more importantly how long such substitution will last, will depend not just on the price of nickel, but also on such factors as:
- Supply chain attitude and initial experience, including recycling issues
- End user initial experience
- Lifetime performance
- The amount of marketing support offered by suppliers of the substitute materials - for long term market success, suppliers of newly-developed materials will need to invest in development of composition specifications, performance characterisation, fabrication know-how, distribution support, availability in a range of product forms and finishes. Of course, all such support involves costs.
In summary:
Will Chinese nickel use continue to increase?
Yes - assuming there are no serious setbacks with the Chinese economy or with the wider global economy of which China is now a vital part. The future pattern of nickel use in China will probably be very similar to the pattern seen in other modern economies.
Will there be some substitution in China of nickel products with nickel-free or low nickel content products?
Yes - but probably not more than has been seen historically in other modern developed markets.
Will such substitution be reversed when nickel prices get back closer to long-term trend?
Too early to say - it depends on experience gained with substitutes. If the substitutes are seen as lower quality, lower performance products, then the substitution will probably be reversed quickly. In the event that the substitutes perform well and deliver real advantages to the end users, then we might see these alloys growing as an established part of the global market. In as much as many potential substitutes do contain some nickel, they could well represent a valuable extension of nickel use, competing vigorously against coated steels for markets.
Is China different?
In many ways yes. But probably not in the key factors that determine nickel use.
