OAO GMK Norilsk Nickel, the world’s biggest supplier of the metal, plans to double its share of the Chinese market as profit from sales to Asia’s largest economy outstrips earnings in Europe.
Norilsk plans to provide as much as 40 percent of China’s nickel imports, up from 20 percent, Deputy Chief Executive Officer Victor Sprogis said in an interview in Moscow, without giving a timeframe. As demand for metal grows from financial investors, the Russian company is also ready to offer copper and nickel to funds that hold them as investments, he said.
“We’d like our share in China to grow because it is the most dynamic market and we see that pace continuing next year,” Sprogis said. “China’s growth is underpinned by demand at the end-user level.” Europe’s demand is led by restocking, he said.
Russia’s increasing commodity exports to China are helping the two forge what President Dmitry Medvedev called their “best ties” historically. Medvedev visited China last month to oversee the signing of orders to supply the East Asian country with oil, coal and nuclear reactors. Norilsk CEO Vladimir Strzhalkovsky, accompanying Medvedev, said China bought a record 25 percent of the company’s output last year, which includes copper, cobalt and palladium.
China last year imported 247,032 metric tons of unwrought nickel, a metal for batteries and stainless steel, according to data compiled by Bloomberg.
Traffic to China
Norilsk sold China 30,000 tons of nickel in 2008 and about 60,000 tons last year. About 74 percent of Russia’s exports to China were natural resources, while 68 percent of Chinese imports to Russia were machines and technical equipment, according to the Federal Customs Service in Moscow.
Increasing traffic to China spurred Norilsk to send one of its five ice-breaker ships on a maiden voyage to Shanghai via the northern, Arctic Sea route last month. The trip cuts the time of delivery from Norilsk factories, located above the Arctic Circle, by more than a month compared with the current route to China via Europe.
Russia’s largest mining company will divert some metal from the European market to meet China’s appetite, Sprogis said, adding that Europe will remain its biggest sales space for now. Norilsk, which generally aims to provide 20 percent of a nation’s nickel imports, in line with its global market share, is raising that target for China and India, he said, without saying what it will be for India.
‘Economically Effective’
“Now we can say that our deliveries to China are as economically effective as our sales to Europe and in some cases even more so,” Sprogis said on Oct. 4 at Norilsk’s head office in Moscow.
This year’s 32 percent rally in the price of nickel, which accounts for about half of Norilsk’s revenue, may continue as the company sees a “positive price trend” at least through the end of the first quarter of 2011, Sprogis said.
Prices gained after the global economic recovery bolstered demand and some producers were forced to rein in output. Vale SA, the world’s fourth-biggest nickel company, suffered strikes at its Sudbury and Voisey’s Bay projects in Canada this year.
“We judge the outlook for the nickel market for the next three to six months to still be positive given the slow ramp-up of new nickel projects coming next year and the strong recovery of stainless-steel production worldwide, especially in the Asia market,” Bonnie Liu, an analyst at Macquarie Securities, said in an Oct. 4 report.
Record Palladium
Norilsk is also enjoying the 47 percent rally this year in palladium, which has outpaced both gold and silver. The metal rose to $604 an ounce today, its highest price since 2001 as investors sought protection from a weakening dollar and physical demand for the metal used in exhaust systems increased. Norilsk accounts for half the global supply and owns 51 percent of U.S. palladium maker Stillwater Mining Co.
Norilsk is “well positioned” to benefit from rising prices, Otkritie Securities Ltd. said in July. “Strong demand from China and a gradual recovery of western economies will support further base-metals prices growth,” the brokerage said in a note.
Consumer demand is being underpinned by that of financial investors, whose interest will only grow, Sprogis said. That allows for the creation of so-called exchange-traded funds in nickel and copper, and Norilsk is ready to supply them with metal, he said.
Metal-Holding ETFs
That would broaden the range of metal-holding ETFs, currently centered on gold and palladium.
ETFs are index-based investment products that allow traders to buy or sell shares of entire portfolios of stock in a single security. United Co. Rusal, owner of 25 percent of Norilsk and the world’s biggest aluminum producer, has said ETFs owning aluminum may appear as early as this year.
“The entities trying to set the ETFs up are trying to figure out right now how interesting these products will be; will they have enough liquidity?” Sprogis said. “Since ETF metal holdings are transparent, we would be happy to work with those funds.”
The 36 percent jump in copper prices over the past 12 months to $8,250 a metric ton leaves Norilsk less optimistic, on concern the price is too volatile. The company provides about 3 percent of global supply and plans to get 35 percent of its revenue from the metal by 2025, up from 26 percent last year.
‘Market Instability’
“If we see that the price is many times above the cost of production, it cannot be considered stable,” Sprogis said. “I’m not sure the market’s financial participants have enough experience to consider the consequences of market instability.”
A commodity that may help Norilsk diversify risks is potash, Sprogis said. “Diversification is interesting, and potash would be no less interesting for us because it doesn’t correlate with our main metals.”
Interest in producing potash, a form of potassium used in fertilizer, has risen as an expanding global population boosts demand for food, putting strain on crops. Russia, Belarus and Canada hold 80 percent of the world’s potash reserves.
Rusal’s billionaire co-owner Oleg Deripaska today repeated calls for Norilsk to review its strategy, including the way it sells products. Norilsk said in August it declined an offer from Glencore International AG, a Swiss trader with an 8.6 percent stake in Rusal, to take over the miner’s nickel sales.
Norilsk doesn’t plan to transfer any of its metal sales to a trader as it’s unclear where the benefits lie, Sprogis said. “Glencore can’t add value to the fundamental parameters” of pricing, such as metal quality and servicing, he said.
“What could be done is the creation of an illusion of deficit,” Sprogis said. “But, such illusions are harmful for producers and the market.”
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