Government policies, more so than the economic forces of supply and demand, are having a significant distorting effect on two of the steel industry’s basic inputs with high-grade iron ore attracting a near-record price premium and nickel enjoying “bull” market conditions after a 20% rise over the past four months.
With iron ore, a commodity widely-reported to have fallen by more than 20% over the past year and therefore in a bear market, steel mills are offering up to $20 a tonne above the benchmark price for high-grade ore classified as lump, and even higher premiums for part-processed iron ore pellets which have had most the pollution-causing impurities removed before being used in a steel-making blast furnace.
Chinese Government demands that steel mills cut their level of smog-causing pollution lies behind the rush to source high-grade raw materials with some small and highly-polluting steel mills threatened with closure unless they clean up their operations.
Low-Grade Ore Is Under Pressure
The chief executive of BHP Billiton's BHP -2.3% iron ore division, Jimmy Wilson, told an iron ore conference in the Australian city of Perth last week that “low grade ore with high impurities will come under pressure” thanks to the tighter rules in China governing heavily polluting industries.
Nickel is enjoying the same benefits as premium-grade iron ore but for a different government policy — a ban on the export of unprocessed ore by the government of Indonesia which oversees the world’s biggest single source of nickel, a key ingredient in the production of stainless steel.
Since November last year the nickel price on the London Metal Exchange has risen from $13,285 a ton to recent sales at $16,115 a ton, a rise of 21.3% which puts nickel in a bull market.
However, as with any commodity being driven by government policy rather than genuine supply and demand there are doubts about whether the nickel price will stay high after the mid-year presidential elections in Indonesia when the ban on unprocessed ore is likely to be revisited and possibly dropped.
Selling Out
BHP Billiton appears to be one of the world’s major nickel producers confident that the price will not stay high with its biggest nickel operation, the Nickel West mining and refining business in Western Australia being offered for sale as part of the company’s attack on poor-performing business units.
While the nickel price could fall sharply if Indonesia lifts the ban on exports the same result is not expected for premium-quality iron ore which is expected to continue rising thanks to a combination of a supply shortage and Chinese Government environmental clean-up demands.
For investors interested in the mining sector the message being sent is that nickel could enjoy a few more strong months, but greater caution will be required once the Indonesian presidential election is finalized whereas iron ore producers delivering a high-grade, low-polluting product, will continue to enjoy priority access to China and a handsome price premium.