18 November 2019

Quintessentially Nickel

Anton Berlin
Marketing Director
Tel: +7 495 7870466
E-Mail: BerlinAV@nornik.ru

Denis Sharypin
Head of Market Research
Tel: +7 495 7877667 ext.3571
E-Mail: SharypinDL@nornik.ru

Alina Racu
Nickel and Cobalt Market Research
Tel: +41 41 729 75 68
E-Mail: Alina.Racu@nornickel.net

Evgeny Semakin
Nickel and Cobalt Market Research
Tel: +86 21 38571333 ext.84111
E-Mail: Evgeny.Semakin@nornickel.net

Daniil Pitirimov
Nickel and Cobalt Market Research
Tel: +7 495 7877667 ext.4114
E-Mail: PitirimovDF@nornik.ru

Nickel 2018 2019E
2.34 Mt 2.42 Mt
Demand
+9% +4%
2.18 Mt 2.36 Mt
Supply
+7% +8%
Market Balance -160 kt -67 kt
Global primary nickel demand grew by 9% in 2018, as a
result of a higher stainless output in Indonesia following to
the ramp-up of Tsingshan-owned stainless lines (+118 kt)
and the growing battery offtake (+60% or +53 kt). Primary
nickel supply also increased by 7% (+147 kt) in 2018 with the
low-grade nickel output growth outweighing the decline in
the high-grade production.
We expect the demand growth to slow down to 4% in 2019
primarily due to slower growth in stainless steel melting.
The increase in demand from the stainless sector will come
primarily from China again on the back of the recently
introduced protectionist trade measures against the
imports of slabs and hot rolled products from Korea, Japan,
and particularly from Indonesia.
Nickel’s uptake by the Tsingshan-owned Indonesian
stainless mill is expected to remain close to the last year’s
level. In our baseline scenario, we revise our forecast on the
300s stainless output at the facility downwards from 2.4 Mt
to 2.2 Mt in 2019. The revision has been made on the back
of increasing stainless trade protectionism, especially the
already mentioned trade policy developments in China and
in the West. Particularly, Tsingshan’s JV partner in the US
was recently denied its Section 232 tariff exclusion request
and the Indonesian stainless products were included into
the EU safeguards in September 2019.
KEY TAKEAWAYS
In addition to that, the growing battery sector is
2020E
anticipated to continue its support of the nickel demand in
2,56 Mt 2019. The nickel demand growth rate in this sector has
+5% deteriorated in 2019 from the last year’s tremendous
2,54 Mt increase as the Chinese EV subsidies are rolled back, and
the next large scale shift to higher nickel intensive cathode
+8%
material formulations is not expected to happen until after
-28 kt 2020. Nevertheless, the battery demand in 2019 could
grow by over 20 kt.
Primary nickel supply is expected to sustain the growth
levels of 2018, with the NPI production continuing to be the
backbone of the supply growth. This year, the NPI output
in China and Indonesia is expected to increase by 154 kt to
886 kt or ~38% of the global nickel supply.
Contrary to the last year’s dynamics, current ferronickel
production stalls, mostly because of the lower Doniambo
and Onca Puma production. The high-grade nickel
production is expected to recover from the dip seen in 2018,
with the metal supply growth plans of Nornickel and
Jinchuan coming to fruition as well as higher output of
chemicals driving this growth.
In a long term, we maintain our view that the nickel market
is undersupplied. On the supply side, reinstatement of the
ore export ban in Indonesia in 2022, and slower HPAL
development globally amidst lower cobalt by-product
credits and the lack of granted environmental permits
could cap the nickel output growth. At the same time the
demand will continue rising, with the expected growth in
the stainless sector of 3~4% pa and the robust appetite of
the battery sector driven by both the growing numbers of
electric vehicles and the shift towards NCM 811
formulation in early 2020s.

MARKET SENTIMENT
Ni LME Cash Announcements of Large Ni Market confusion
$/t outflow from over immidiate
Indonesian ban from
2020 LME Indonesian ban
19,000 warehouses
First announcements of
potential Indonesian ban
18,000
Tom-next Meeting of Indonesian in 2020
17,000 backwardation at 40$/t Strong Chinese President with CEOs of
PMI Tsingshan, Huayou, and
16,000 Brunp
Positive sentiment on The return of
15,000 improved trade talk New Caledonia Onca Puma China's NEV
expectations issued the ore operation decline
14,000 High FPC
Strenghtening premiums Ramu tailings spillover
13,000 US dollar IWH China Fed cuts
Strong interest rates
12,000
Chinese Stainless News on capital cost
US Tariffs on $200bn
11,000 Suspension of increase on potential
Vale dam burst Chinese products raised
Onca Puma Plant HPAL projects
10,000 from 10% to 25%
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19

Source: NN analysis, London Metals Exchange

After a sharp decline in 2H 2018 when the US announced
the first wave of tariffs on Chinese import and news of low-
cost large-scale HPAL projects in Indonesia appeared, spot
nickel prices went above $13,500/t in Q1 2019 initially
spurred by the Vale's dam collapse with the attendant
concerns over future investments and stability of the nickel
supply. The sentiment over US dollar strengthening and
the US decision to impose trade tariffs of above $200 bn on
Chinese products rising from 10% to 25% put a pressure on
2
nickel in Q2 2019 and the prices fell back to $12,000/t levels.
However, the suspension of Once Puma ferronickel smelter
owned by Vale, as well as robust Chinese stainless steel
production data and positive expectations towards
successful negotiations to resolve the US-China trade
issues at the G-20 Osaka Summit supported the nickel
prices in June, while the overwhelming news flow from
Indonesia starting from July escalated the prices further.
Indonesia, as one of the most prominent suppliers of nickel
ore, announced a ban on the export of unprocessed ore in
Jan 2014, but eased the constraints in 2017 under the new
system of export permits and was set to enforce the ban on
raw mineral exports fully in 2022. The ban was supposed to
push miners to build processing plants. In turn, this would
increase the export value of natural resources, as was
declared by the Indonesian President Joko Widodo,
recently re-elected for the second term. However, in July,
the President held a series of meetings with CEOs of
Huayou, Brunp and Tsingshan. The Chinese delegation
“offered several policy suggestions and proposals on
further optimizing the investment environment in
Indonesia…President Joko responded positively”.
Over the course of July, a few statements were made by the
Indonesian officials re-confirming the original plan to
enforce the ban on raw mineral exports in 2022, but from
the beginning of August the ministers were refusing to
comment whether ore export ban could be brought
forward. Despite the expectations that Joko Widodo would
not finalise the new cabinet until his second inauguration in
October with no subsequent immediate ore ban
anticipated, nickel prices peaked at $15,000/t on Aug 6
because of the growing unease of the market participants.
On Aug 13, it was officially announced that a revision of the
mineral ore export rules was being drafted by the
Indonesian government and the president was to decide
whether the ore export ban would be brought forward. On
Aug 29, nickel prices hit $16,300/t amid extraordinary
speculators' activity caused by fears of shortages from
Indonesia, and on Aug 30 Indonesia’s Energy and Mineral
Resources Minister signed a new regulation on restricting
ore exports, which expedited the ban, applicable to all
grades of nickel ore, from Jan 2022 to Jan 2020. The 3-
month nickel contract surged as much as 5% to $18,850/t,
the highest mark over five years. Goldman Sachs exerted
pressure to the bull market with a forecast that the nickel
price could mount to $20,000/t over three months, but the
rally hadn’t been maintained with the price fluctuating
between the levels of $17,000–18,000/t in September and
early October.
In this timeframe, Vale, one of the largest nickel producers,
through the purchase of put at $15,667/t and call at
$18,681/t options hedged one third of its production
amounting 88,000 t. It has become a strong signal for the
market triggering short positions opening.
In mid-October, the price plummeted to $16,000/t.
Apparently, two main reasons were behind this downturn:
negative data on China’s NEV output following the
reduction of governmental subsidies, and, according to
some market rumours, a broker's technical mistake:
someone incorrectly distributed the orders and
accidentally entered the ring with a significant short
uncovered position. As a result, the price crashed down
from $17,300 to $16,400/t in just 10 minutes.
In the end of October, Indonesia announced it would halt
the export for a few weeks because of the investigation
over irregular ore exporting practices as, allegedly, some
exporters tend to manipulate the existing rules and freight
high-grade ores. The nickel price briefly spiked to $16,900/t
turning the market into a state of uncertainty.
During the investigation, an approximate amount of 30–40
vessels being held in Indonesian ports (17-23kt Ni), and on
11 November the local authorities allowed nine companies
to resume the export. Despite the temporary suspension in
ore freighting, the current volume of nickel ore inventories
at Chinese ports rebounded to 14.6 Mwmt, the highest
level since Nov 2018, which could partly offset the deficit in
2020.
Alongside the nickel price rally, the market faced an
unprecedented LME stocks drawdown. Over 85 kt of nickel
were flown out of registered warehouses in September-
October. However, net outflow of 100 kt was solely
registered in Asian warehouses being –49 kt in Johor, –30
kt in Kaohsiung, –28 kt in Singapore and
–10 kt in Dubai respectively, while European warehouses
indicated net inflow of 15 kt.
According to some rumours, one of the main forces behind
the drawdown was Tsingshan, the world’s largest stainless
producer consuming approximately 500 kt of primary
nickel pa and producing ~300kt Ni in NPI, who decided to
secure its supplies ahead of the approaching Indonesian
ban. Allegedly, the company had already bought over 100
kt of nickel from the LME warehouses, Chinese on-shore,
bonded and other off-warrant stocks with a total value of
$1.5 bn.
Another consideration for Tsingshan is a significant lag in
Morowali HPAL project in Indonesia primarily due to the
delay in obtaining an environmental permit from the local
authorities for tailings disposal in the sea. We think the
project is unlikely to be commissioned and ramped up
earlier than 2021, while Tsingshan supposedly has
obligations to supply nickel units for CATL/Brunp and GEM
in a long term. Moreover, higher nickel prices are
favourable for accelerating the construction of Tsingshan’s
new NPI and capital-intensive HPAL plants.
In September, market turned into a state of persistent
backwardation, and the benchmark Cash-3m spread at a
point fell to $300. The correspondent collapse of premiums
was drawing on the backwardation, slashing to $65–70/t for
FPC and briquettes in Rotterdam in mid-October down
from $200/t a month ago, but the most severe hit was
registered in Shanghai, where FPC and briquettes were
traded LME flat or even lower. The LME launched an
investigation to mitigate the impact of the outflow,
although the volume of stocks had already dipped into the
multi-year trench. The Exchange also declared during the
LME Week that it intended to oblige stock owners to report
off-warrant inventories starting Feb 2020. This had eased
the pressure switching the market into a slight contango
and improving SHFE/LME import arbitration against
November contract at $300/t profit compared to a loss of
$700/t a few weeks ago, which caused a substantial rise of
FPC CIF Shanghai offer ascending from $60/t discount to
$150/t range premiums.
3
 MARKET BALANCE
Nickel market anticipated to be fairly balanced in 2019 with
a slight deficit of 67 kt up from 160 kt seen in 2018. However,
the announcement of Indonesian ban starting from 2020
realigned the balance.
The outcome of our initial analysis of the early ban
introduction was virtually the same market balance as
before with a marginal deficit of -28 kt. We assume that
prohibition of raw ore exports subtracts 270 kt of nickel
supply in 2020. However, this shortfall could be covered
almost entirely by higher NPI production in Indonesia,
additional Filipino ore exports, processing of Indonesian
ore shipped in Q4 2019 and restarts of various assets
globally in a higher price environment.
Change in ore shipments will primarily affect Chinese NPI
production. Indonesian NPI output tends to increase to 326
kt in 2019 (+24% YoY) with a potential spike to 490 kt in
2020 driven by Tsingshan, Delong and WedaBay, although
some ramp-ups might be delayed. In the long-term
perspective, the NPI production in China could be entirely
offset by NPI production increase in Indonesia.
As already experienced in 2014, the main focus has shifted
to the Philippines, a large source of nickel ore. The ban will
encourage Philippine miners to boost the output to
additional ~50 Kt, but the local mining operations were
shut down in October. However, the Filipino government
has been tightening environmental regulations since 2016
DEMAND
Primary Ni Demand, Mt Y-o-Y
+5%
+4%
2.6
2.5
2.4
Demand China Other Batteries Alloys & Plating Demand Demand
2018 STS STS SpS 2019E 2020E
STAINLESS STEEL
The nickel demand grew at a slower pace in 2019 compared
to the year before amid a slowdown in the global economic
activity and trade uncertainties. The demand was primarily
driven by a robust 300 series stainless output in China. The
stainless steel sector in Indonesia also contributed to an
uptake in nickel consumption, even though by a smaller
margin than before given the rising trade barriers against
the country.
The wave of protectionist measures adopted by several
countries across all regions has led to a decline in global
stainless steel trade flows of around 20% YoY in 1H 2019.
The US tariffs imposed on various goods starting from Mar
2018 triggered a wave of retaliatory protectionist measures
around the world and the trade war with China. European
mills were not able to ship material to the US at previous
levels, while at the same time the EU market was becoming
an alternative placement for cheap Asian stainless steel,
prompting the European Commission to intervene with
safeguard measures.
and ore from the Philippines is typically lower and mid-
grade. Additionally, up to 10 kt may be delivered
additionally from New Caledonia and Guatemala with a
special consideration to French mining company Eramet,
which obtained 4 Mwmt export quotas at the SLN nickel
project in 2020.
How much ore can Indonesia supply by Jan 2020? Before
the ban was introduced in 2014, Indonesia shipped 69 Mt in
2013 and Jan 2014. We estimate that Indonesia may
potentially supply only up to 30 Mt this time constrained by
the lack of vessel, barges and possible export disruptions in
November-December.
The latest array of news from Indonesia were rather
confusing. First, there was mentioning of a chance that the
ban could be introduced immediately, followed by a
counter statement that this is a voluntary agreement of the
mining community rather than the ban imposed by the
government, and then a later commentary stipulating it is
a temporary suspension to investigate whether exported
ore grades were compliant to existing regulation.
We believe that 2020 would be a transitional year for the
nickel market. In the longer run, as early as 2021, we
assume that growing Ni demand and the lack of
unprocessed ore from Indonesia will have a positive impact
on the nickel market shifting it to a structural deficit.
The permanent European safeguard measures imposed in
Feb 2019 alleviated some pressure from external imports
for the European mills, leading to the decline of 15% in
imported volumes. Nonetheless, when annualised, these
imports from countries as India, China, Taiwan, China,
Indonesia and South Korea would still account for a quarter
of the European stainless production.
In postocular, Indonesia, exempted from the measures
under the developing country provision, increased its
stainless deliveries in 1H 2019 six-fold to over 100 kt YoY
and reached the share of almost 15% in hot rolled and cold
rolled products from less than 2% a year ago.
Following a petition signed by EUROFER and European
mills, in the end of September the European Commission
decided to update the list of exclusions for developing
countries based on more recent imports statistics, and thus,
included Indonesia into the list, as well as bring down the
rate of progressive increase of quotas from 5% to 3%. The
changes would apply for the second year of measures that
started in Jul 2019. It is important to note that the European
safeguard measures do not cover semi-finished stainless
products such as slabs, implying that Indonesia would be
allocated a quota on hot rolled and cold rolled stainless
steel only, while still allowing the country to ship slabs
unrestrictedly.
In fact, in Jun-Jul 2019, for the first time in history, Italy
imported 25 kt of stainless steel slabs from Indonesia.
Rumour had it that Italy’s largest cold rolling plant
Marcegaglia imported these volumes to be toll-rolled by
AST, the only local mill equipped to roll slabs into hot rolled
coils, to be further processed by Marcegaglia itself. While
AST has sufficient spare capacity to process external slabs
4
into hot rolled coils in addition to its own production, the kt Indonesia Stainless Steel Production
weak demand remains as an issue and it is unclear for now 300
whether the imported volumes would substitute their +2% YoY
actual melt output. 250

At a time of intensifying competition with the low cost 200

Asian producers as well as rising climate change
compliance costs in Europe, EUROFER is now urging 150 300 series 2018
authorities to implement a carbon border adjustment tax 300 series 2019
100
system in order to re-establish a level playing field for 200 series 2019
producers across different regions. 50
In Q3 2019, stainless steel prices lowered to the bottom 0
levels of $2,200–2,400 for 304 grade, which may cause the Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
end-use annual growth in the middle term at 3-4% due to
the favourable price environment. From Jan to Oct 2019, the growth of steel production in
Indonesia amounted to 24% YoY, but the production of the
China and Indonesia 300 series increased by only 2%. After China imposed
The trade tensions in the stainless steel industry have been temporary anti-dumping duties on stainless imports,
exacerbated by the low cost producer Tsingshan in Tsingshan was forced to reduce exports to China and
Indonesia. With a 3 mln tpa stainless capacity to fill, increase supplies to other markets, causing a necessary
Tsingshan Indonesia has become a real threat to the transition to 200 series production. Therefore, the overall
traditional producing regions. The tariffs in the US, with the increase in production led to a raise in nickel consumption
subsequent denial of exemption for Tsingshan’s JV with by only 7 kt or 5%. Current Indonesian stainless production
ATI, imposed safeguard measures in Europe and anti- is estimated at 2.7–2.8 mln tpa in 2019, including both 200
dumping duties in China have been constraining the and 300 series.
company to diversify the production. Nonetheless, China Stainless Steel Production
kt
Indonesia managed to balance out the losses in China and
1300 +9% YoY
the US by exporting significantly larger volumes of
stainless products to Taiwan, Korea, Southeast Asia, India,
and Europe. 1100

Export of Stainless Flat Products from Indonesia

900 +17% YoY
800 kt
China -455kt
700 kt
Taiwan +140kt 700
600 kt
Malaysia +57kt
500 kt 500
+5% YoY
EU28 +105kt Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
400 kt
200 series 2018 300 series 2018
300 kt India +45kt 200 series 2019 300 series 2019
200 kt The stainless sector in China grew faster than previously
S. Korea +130kt
100 kt expected thanks to imposed protection from the low-cost
Others +30kt Indonesian import. 300 series stainless output was up by 9%
0 kt
1H 2018 1H 2019 YoY in Jan-Oct 2019 backed by Tsingshan and Delong. The
increase in production of 300 series in China is expected to
For India specifically, Tsingshan has ambitious plans. The be above 2 Mt. Manufacturers of 200 series also took
company is aggressively investing in a 1 mln tpa capacity advantage of the favourable situation in the stainless
cold rolling mill, to be expanded to 2 mln tpa capacity and market with the output surging to 17% YoY. Baogang-
vertically integrated with a 4 mln tpa hot rolling and Desheng expanded production of 200 series after partially
melting facilities by 2023. To put this into perspective, the switching to carbon steel production in 2018 due to
current total production of stainless steel in India is just disadvantageous price fluctuations. Tsingshan Yangjiang-
over 4 Mt in 2019. Quangqing, a member of Tsingshan Group, also suspended
It is not surprising then that the Indian government, production of 200 series in 2018, but then returned to
supported by the Indian Stainless Steel Development production in 2019, also raising its production of 300 series.
Association and the largest local stainless producer Jindal The strengthening of 300 series consumption was mainly
Stainless, initiated an anti-dumping investigation on hot attributable to the oil and gas, petrochemicals, and food
rolled and cold rolled coils against 15 countries, including industry. According to some preliminary estimates, the
Indonesia, in Jul 2019. total production of stainless in China in 2019 may approach
28 mln tpa.
However, even if India slapped anti-dumping duties on
Indonesia, who more than tripled its shipments in 1H 2019 Since July, while the nickel prices had surged, the discounts
compared to the previous period, this would be only a of NPI have been widening reaching $2,500 in October. On
temporary headwind for Tsingshan until it builds up the the other side, FeNi discounts have been gradually
integrated plant fed with NPI from Indonesia. shrinking, making FeNi an unfavourable choice as an
intermediate for stainless steel production. Due to the

5
sustained NPI discounts, some European steel makers The year 2019 unfolded as an increasingly challenging one
were considering NPI as a raw material for stainless for the European stainless mills. Hit by a slump in demand
production but discovered a set of substantial drawbacks, across all end use segments, particularly appliances and
for example, the need to reorganise their supply chain and, automotive on the one hand, and by rising cheap stainless
comparing to scrap and FeNi, expanding their carbon steel imports from Asia on the other hand, the major
footprint constrained by the EU laws. European mills saw themselves forced to cut down
The increase in production rates was accompanied by a production throughout the first three quarters of 2019 and
strong uptick in stainless stocks at the Wuxi and Foshan even reduce staff by 10–15%.
warehouses. In September, following the rebounded nickel The outlook remains subdued for the rest of the year and
prices, the stocks reached a record high of 700 kt to offset the start of the next year with low visibility beyond that due
the possible supply gap from the looming Indonesian ban. to short order books. For 2019, we estimate a fall of -6-7%
The stocks are predominantly of the nickel-containing 200 YoY in stainless steel output. Within the stainless steel
and 300 series with a limited share of ferritic 400 series. sector, 300 series decline was less steep than non-nickel
China Stainless Stocks bearing ferritic grades, which are mostly used in
kt
(Wuxi and Foshan) automotive and household appliances end-use segments.
800
On the other hand, due to the increase in the loading of
600 scrap by mills this year, a relatively higher consumption of
Class I nickel is required to balance the iron units, therefore,
400 we anticipate the consumption of Class I nickel to decrease
by only 2–3%. In 2020, we expect a modest recovery to
200 perhaps 5% YoY.
The scrap market has recently seen unprecedentedly low
0
nickel payabilities of below 50% on the LME price from
2016-06
2016-08
2016-10
2016-12
2017-02
2017-04
2017-06
2017-08
2017-10
2017-12
2018-02
2018-04
2018-06
2018-08
2018-10
2018-12
2019-02
2019-04
2019-06
2019-08

previous levels of 80–85% a few years ago, a situation

driven by higher scrap availability and further exacerbated
by volatile nickel prices, especially after the announcement
200series 300series 400series
of Indonesia to ban nickel ore exports. Squeezed by cheap
Stainless producer inventories also rose in August peaking stainless Asian imports, European mills are moving away
at 800 kt to ensure continuous supply of stainless mills. from the LME price-based system and instead are
Producer stocks elevated higher comparing to the normal matching the nickel pricing with Chinese NPI price in
levels of 500–600 kt, which could cover the possible deficit absolute terms. Also on the sales side, stainless steel
in 2020. products are now increasingly sold in Europe under an all-
in pricing formula rather than the old base price plus alloy
Chinese Stainless Producer Stocks
kt surcharge formula.
1000 USA
The protectionist measures taken by the US
800
Administration in Mar 2018 under Section 232 had
600 materialised in lower import volumes (-20% in Jan-Jul 2019
YoY). The decision to deny ATI’s JV with Tsingshan
400
exemption from the tariffs in Mar 2019 cut down
200 Indonesian stainless steel deliveries, which until then
amounted to around 20 kt every two months. Accordingly,
0
total American exports shrank by 50% following other
Apr-19

Jun-19

Aug-19
Mar-19

May-19

Jul-19
Feb-19
Jan-19

Sep-19

countries’ retaliation on Section 232.

200 series
The Shanghai Futures Exchange introduced the stainless
steel futures on Sep 25, hitting a trading volume of around
190,000 lots on the first day. The volume remained high for
a few days, but then declined to negligible levels. The
market is still in the process of evaluation this financial
instrument and assessing the impact it may have on the
Chinese nickel market.
Europe
At the start of 2019, the imposition of permanent
safeguard measures by the European Commission, rising
nickel and ferrochrome prices as well as a short-lived
recovery in order books gave an artificial boost to the
stainless market sentiment and generated expectations
that could not materialise, as market players had soon
realised.
However, the positive effects of Section 232 were partly
300 series
offset by a sluggish stainless steel demand and
macroeconomic uncertainty in the light of the US-China
trade war, resulting in a drop in the melt output of around
8% YoY in 2019. In terms on primary nickel demand, we
estimate a softer decline of around 3% YoY followed by flat
growth in 2020.
ALLOYS
The nickel alloys sector in both Europe and USA had a
robust start in 2019 driven by demand from the oil and gas
and chemical processing industries. However, in the
second half of the year, the end-use demand toned down
due to slower drilling activity in the current low oil price
environment. Deep-sea exploration and production
projects, requiring high corrosion resistant alloys such as
Inconels (with >50% nickel content), generally have higher
oil incentive prices of about $70–80 per barrel.

6
While the large producers of nickel alloys with a broad
product grade portfolio have been able to balance these
setbacks by taking orders from other industries, the
smaller mills, especially in Europe, saw their order book
decline in the third quarter.
In the latest version of this report, we discussed the
growing demand for nickel alloys used to fabricate marine
scrubbers. While order backlog for ship retrofits has been
increasing, some market players note a slower than
expected demand in this segment as scrub manufacturers
still trying to use a mix of alternative materials for the
various parts of the scrubbers.
Overall, we estimate the nickel demand in alloys in Europe
and Americas to incur a slight decrease of -3% to 98 kt
compared to 2018.
One positive trend for nickel in this sector, which is worth
mentioning, is the increasing usage of nickel alloy cladded
pipes instead of solid carbon steel pipes to avoid costly
equipment failures in oil & gas projects due to corrosion, as
has already happened with some projects in Kazakhstan
and the Middle East in the past few years.
The aerospace industry and underlying superalloys
segment have experienced a decade of continuous growth
and accumulated a massive order backlog equivalent to 8–
10 years of aircraft production. However, the issues with
Boeing 737 Max might undermine the future growth of the
industry. For this reason, we expect the nickel consumption
in superalloys to modestly increase by 2% in 2019 and 2020
in Europe and USA, albeit from an already high base.
On Nov 8, stainless steel producer Acerinox acquired
world’s largest nickel alloys producer VDM from the private
investment firm Lindsay Goldberg Vogel for €532 mln with
the deal to be closed by the end of Q1 2020. Unlike
Aperam’s attempt last year, this transaction is expected to
get European Commission’s green light since Acerinox
does not own any assets in the nickel alloys business. At a
time when the stainless steel market is facing strong
headwinds, the acquisition is supposed to complement
Acerinox’s product portfolio and provide a boost in sales.
Nickel demand in superalloys segment in China is
anticipated at 4 kt in 2019 with a slight uptick to 4.5 kt in
2020 stemming from the commencement of mass
production of Chinese aircraft C919, which is scheduled to
begin in 2021.
BATTERIES
There are three major factors that are contributing to the
nickel uptake growth – (1) growing EV production, (2)
higher driving range requirements, and (3) the desire to
decrease the exposure to cobalt.
A combination of these 3 factors supports the demand
growth for nickel in batteries: primary nickel use in
batteries is forecasted to reach 200 kt in 2020.
China has been the epicentre of growth, which will remain
the focus of industry’s development in the near future.
However, the sales of NEV decreased over the last 4
consecutive months amid tightening subsidy policies since
March with a three-month transition period. It forced the
NEV manufacturers to boost their output ahead of the
upcoming subsidy cuts, however, since July the market has
become weak. The subsidies have been slashed by 75%
compared to 2018.
However, to offset the subsides’ cut, the Chinese
government has implemented the shift to the dual credit
system. Auto-manufacturers can obtain special points if
they manage to achieve a required share of NEV and
correspondent emission levels, with extra points for
producing BEV with long driving range. Points could be
either sold to other manufacturers or exchanged for some
emission quota increase. By implementing this policy,
Chinese authorities attempt to achieve a NEV share in total
vehicles sales of 7% by 2020, 20% by 2025, and 30% by 2030
respectively.
NEV sales in China
'000 units
Jan-Oct 2019, YoY
250
+11%
200
150
100
50
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
NEV sales 2018 NEV sales 2019
Another force causing the NEV sales decline was the
introduction of Environmental Standard 6 in Jul 2019,
which thoroughly regulated the toxicity of exhaust gases.
Although the introduction of new environmental rules had
not directly constrained the car sales, consumers became
concerned over the probable difficulties to re-sell a car with
the exhaust system of Standard 5 in the future. This led to
a wide accumulation of cars at dealer centres, and dealers
were forced to trade off the cars with significant discounts,
which affected the EV market as customers’ attention
turned towards the cheap vehicles with internal
combustion engines.
In Europe, the EU Commission stimulates rapid transport
electrification by setting an emission limit for light vehicles,
which is slashing from 121 g CO2/km in 2018 to 59 g/km in
2030. The auto-concerns not obeying the regulation will be
imposed to pay off multi-billion euro fines gradually
increasing over the years.
To prevent the negative outcomes, automotive industry
invests $300 bn in electrification with 45% of investments
directed to China, 25% to EU and 10% to the US.
Accordingly, BEV share is estimated to surge by 20 times
to 10 mln cars by 2025, while PHEV is to increase ten-fold
to 3 mln cars and hybrid vehicles eight-fold to over 15 mln
cars respectively.
As covered in our latest report, nickel-containing
NCM/NCA cathode materials provide superior energy
capacities, while more nickel-intensive variations of these
CAM types further enhance energy capacity, helping boost
the NCM/NCA CAM orders. We expect a gradual shift
towards Ni-intensive chemistries by 2025 to further boost
nickel production.
China, Japan and South Korea command up to 99% of the
current NCM/NCA PCAM market with the nickel
consumption in China at 104 kt for CAM and PCAM
production, 81 kt in Japan and 37 kt in South Korea. An
7
export flow of 16 kt of nickel in PCAM originated in China is
traced to South Korean market for internal EV production
capacities while other trade flows are negligible.
Nickel Demand in Batteries
213
149
54
140
80
9
2015 2018 2020E
Li-ion EV Li-ion non-EV NiCd
Overall, more than 70 battery production projects with
capacity over 1 GW have been announced since 2015 with
2/3 situated in China amounted $110 bn of total
investments. Global battery production capacities may
increase to 1,200 GWh by 2023 and 2,000 GWh by 2028
with the share of China being over 70%. A rough estimate
of nickel used for 1 GWh factory producing NCM 622 is 0.7
kt with CAPEX over $120 mln, which is expected to be one
Primary Ni Supply, Mt
2.2
Supply Indonesia China Fe-Ni Class I Others
2018 NPI NPI
HIGH GRADE NICKEL
Class I
Class I production is expected to recover in 2019 due to
higher targeted production by Norilsk Nickel and Jinchuan,
as well as incremental increases from other producers.
Nickel Chemicals
In 2019, the production of primary Ni chemicals (excluding
production from metal dissolving and battery recycling)
would increase by 17 kt, with the growth stemming from
the rising nickel sulphate production in China and other
areas, directed at feeding the expanding battery sector.
The key increase will come from MCC’s 40 ktpa NCM 622
precursor project in Tangshan City, integrated with the
production of NiSO4 solution. The company launched the
operation in Dec 2018 and this year we expect it could
produce up to 10 kt of Ni in NiSO4 to feed the precursor
material production ramp up.
MCC is a major shareholder in the Ramu nickel project, one
of the key suppliers of MHP for a number of NiSO4
producers in China. In 2019, Ramu is expected to produce
around 35 ktpa of Ni in MHP. Increasing captive
consumption of MHP for the needs of its own precursor
of the main drivers in sustaining a steady nickel production
growth.
In Europe, the battery supply chain is just being built as EV
cell manufacturers have announced around 20 gigafactory
projects by 2028. The EU is updating its Battery Directive,
521 which will support, among others, the securing of raw
materials for future manufacturing plants and a number of
cooperation agreements have been reached among
market participants.
European cell manufacturer Northvolt, which is building a
430
32 GWh plant in Sweden, announced R&D cooperation
plans with Tanaka Chemical whereby the latter would
provide the license for precursor cathode material
2025E technology.
NiMH Umicore has earlier this year purchased the Kokkola cobalt
refinery, Europe’s largest, and an associated PCAM
business from Freeport-McMoRan. Umicore has recently
signed strategic agreements with Korea’s LG Chem and
Samsung SDI to supply 125 kt and 80 kt respectively of
NMC cathode materials over several years starting with
2020. In fact, Umicore’s newest cathode material plant will
be located in Poland in the proximity of LG Chem’s
gigafactory.
SUPPLY
project in Tangshan would imply lower availability of the
Y-o-Y Ramu material for the rest of the market in 2019.
Yet, we believe that the growing feed supply from
+8%
Terrafame (+3 kt), Gordez (+2kt) and relaunch of
+8%
Ravenstorpe in 2020 (+15-20kt) should help to feed the
2.5 growing primary sulphate output.
Last year, BHP also announced its plans to start NiSO4
2.3 production, targeting the operation start in Apr 2019, but
the faced a delay until 2H 2020.
FERRONICKEL
Supply Supply In 2018, the ferronickel output endured a significant
2019E 2020E expansion of 21 kt, driven primarily by the Koniambo ramp
up and recovered output from Solway against a low 2017
base. In 2019, the global ferronickel production is expected
to fall as a result of disruptions at Doniambo, Onca Puma
and Cerro Matoso.
NPI
In the recent years, NPI production became the backbone
of the nickel supply growth. NPI production in China and
Indonesia estimated to increase by 154 kt to 886 kt in 2019.
The Indonesian NPI output growth was primarily
maintained by a series of ramp ups by Tsingshan and
Delong and an expected rise of 24% will result in
Indonesian NPI production reaching 326 kt by the end of
2019.
NPI production in China also continued to uptake in 2019.
This was facilitated by growing demand stemming from
the stainless-steel sector and increased ore supplies from
Indonesia. The main contribution to the production growth
was made by Xinhai introducing 8 new furnaces that
expanded its production capacity by 44% to 140 kt in 2019.
Dingxin, Guangxin Suntec and Century, members of
Tsingshan Group, also widened production of NPI by about
20 kt. The loose environmental restrictions also
8
contributed to NPI production uptick too. We expect that In Jun 2017, Eramet announced that it had entered into an
total NPI production in China to reach 560 kt in 2019. agreement with Tsingshan on Weda Bay while Tsingshan
acquiring 57% of Strand Minerals (Eramet holding the
Ni, Kt
China NPI Production remaining 43%). Strand owns 90% of the Weda Bay project
60
with the balance held by PT Antam. A ceremony for the
55 inaugural ground-breaking for the Weda Bay Industrial
50 +30% YoY Park was held in Aug 2018. Zhenshi has become a partner
in the project in 2018. The project will be developed in two
45
phases. The first phase is to have a total investment of $5
40 bn and will include 4 RKEF lines to produce 30 ktpa Ni in NPI
35 (plus additional 8 RKEF lines in partnership between
30
Zhenshi Special Steel and Tsingshan taking capacity to
Jan Feb Mar Apr May Jun Jul Aug Sen Oct Nov Dec around 90–100 ktpa Ni).
2018 2019 Shanghai listed Shengtun announced in Aug 2019 that its
HK subsidiary called Hongsheng International will inject
In 2019, the Chinese NPI maintained a high margin, which $55 mln into a company called Huawei Nickel. After the
stimulated further increase in production both in China and capital injection Shengtun will hold 55% of Huawei Nickel
Indonesia. and Huayou’s HK subsidiary will hold 45%.
HG Margin Then Huawei Nickel will set up a company called PT
USD/t Ni
Youshan Nickel Indonesia together with Tsingshan’s
5000 subsidiary called Hengtong Asia, of which Huawei Nickel
4000 will hold a 65% stake, Tsingshan will hold the remaining
35%.
3000
PT Youshan Nickel Indonesia will build a 34 kt nickel matte
2000
capacity with total investment of $406 mln and Shengtun
1000 will contribute to $145 mln according to above stake holder
0 structure.
-1000 HPAL DEVELOPMENT
Apr-17

Apr-18

Apr-19
Jul-17

Jul-18

Jul-19
Jan-17

Oct-17

Jan-18

Oct-18

Jan-19

Plans to build two large-scale HPAL projects at the

Industrial Morowali Park were announced in autumn of
However, the looming ban on export ore from 2020 to push 2018, namely PT QMB New Energy Materials and PT Huaqi.
for more on-shore production and development of The first project is a joint venture of BRUNP, GEM,
downstream industries will more likely cause a substantial Tsingshan, IMIP and Hanwa. Tsingshan is also involved in
surge in Indonesian NPI production. We revised the the second project in partnership with Huayou that holds
potential NPI output in 2020 to 490 kt due to the scheduled the majority stake in the JV.
ramp ups by Tsingshan, Delong, Weda Bay as well as other The first project has announced conspicuously low CAPEX
minor producers. of $700 mln for a total production capacity of 50 ktpa Ni,
On the other hand, Chinese NPI realigned to the downside which translates into the capital intensity of $14,000/t. To
due to the cut-off of 270 kt previously exported from put it into the context of the existing HPAL projects, it is 6–
Indonesia. Additional ore supplies from the Phillipines, 7 times lower than the achieved capital intensity of
New Caledonia, Guatemala and ore stocks accumulated at Ambatovy and VNC and more than 3 times lower than
Chinese ports could partly offset the threatening deficit, Ramu Nickel project. Considering the HPAL’s history and
and we estimate NPI production in China in 2020 at 438 kt, technological difficulties, the announced plan to
22% down YoY. commission the facility by the end of this year also seemed
overly ambitious. Nevertheless, it was enough to influence
Ni, kt NPI Production by Country some parts of the investment community who was losing
confidence in the bullish EV narrative for nickel.
1000
800
In our previous report, we have explained our doubts
regarding the planned CAPEX, planned commissioning,
600
and the ramp up schedule of the project. Our recent
400 findings confirm these initial doubts.
200
We are now hearing that the CAPEX target was raised to
0 $1.5 bn. Currently, the company is working on an
2012

2013

2014

2015

2016

2017

2018

2019E

2020F

environmental impact assessment for the Indonesian

China
In early November top Chinese steelmaker China Baowu
Steel Group has signed a strategic framework agreement
with Shanxi Taigang Stainless Steel and Shandong Xinhai
Technology. The collaboration is a key milestone in China’s
stainless steel industry, which is embracing the integration
of NPI and stainless steel.
Ministry of Environment and Forestry.
Indonesia As discussed in our previous report, the deep-sea tailings’
disposal that is implemented in the Ramu project could
face obstacles in Indonesia. Unlike the Ramu project that
benefits from deep seabed in Papua New Guinea, the
projects in Sulawesi do not enjoy the same luxury as deep-
sea areas are approximately 500 km east of the island.
After a spillage from Ramu Nickel Plant into Basamuk Bay
the global wet smelting tailings deep-sea disposal is facing
9
challenges. A number of PNG’s officials called for closing Economics of laterite leaching projects strongly depends
the Ramu project. on the payable cobalt value. The usual ratio of Ni:Co in
Deep-sea tailings disposal for HPAL projects are under intermediate products of high-pressure acid leaching is
construction in Indonesia are still pending permission. from 12:1 to 10:1.
Should the government disapprove this technique, the Cobalt Price
$/t Co
implementation of some projects would be in question. PT
QMB New Energy Materials project decided to use tailings
80,000
dam. According to the GEM president and board chairman MB Standard Grade
Xu Kaihua, the tailings dam is currently going through an Low
60,000
approval process and would raise the overall cost. He said
that the dam would need to be about 30 m high to meet
requirements for tailings. 40,000

Regarding the project commissioning timeline, we

20,000
maintain our view of a 2021 start, in Q2 at best, with the

Dec-18

Jun-19
Aug-18

Mar-19
Apr-19

Aug-19
Jul-18

Nov-18

Feb-19

May-19

Jul-19

Nov-19
Sep-18
Oct-18

Jan-19

Sep-19
Oct-19
project ramping up to capacity by 2023.
The second project, run by Huayou, is likely to follow a
similar construction and ramp up schedule.
Source: Shanghai Metals Market, FastMarkets (MB)
The third HPAL project has been developing on Obi island.
37kt Ni capacity is likely to be launched in 2H 2020, The drop of payable cobalt price in CoSO4 from more
however it seems that the environmental permit hasn’t
than $90,000/t at the beginning of Q3 2018 to the
been granted to this project as well.
current ~ $40,000/t results in the HPAL projects’ cash
A project in Australian Queensland called Sconi may fall cost increase of ~ $5,000/t Ni after the deduction of
behind schedule as the agreement on pre-payment and
cobalt credits.
off-take between its operator Australian Mines and SK
Innovation has recently been terminated. According to our calculations, this raises the incentive
The development of other HPAL projects has stalled nickel price for HPAL projects to $17,000/t assuming a 10-
amidst a volatile nickel price environment and a drastic year payback and 5% IRR.
reduction of the cobalt price.

10
 DISCLAIMER
The information contained herein has been prepared using information
available to PJSC MMC Norilsk Nickel (“Norilsk Nickel” or “Nornickel” or “NN”)
at the time of preparation of the report. External or other factors may have
impacted on the business of Norilsk Nickel and the content of this report, since
its preparation. In addition all relevant information about Norilsk Nickel may
not be included in this report. No representation or warranty, expressed or
implied, is made as to the accuracy, completeness or reliability of the
information.
Any forward-looking information herein has been prepared on the basis of a
number of assumptions which may prove to be incorrect. Forward looking
statements, by the nature, involve risk and uncertainty and Norilsk Nickel
cautions that actual results may differ materially from those expressed or
implied in such statements. Reference should be made to the most recent
Annual Report for a description of major risk factors. There may be other
factors, both known and unknown to Norilsk Nickel, which may have an impact
on its performance. This report should not be relied upon as a recommendation
or forecast by Norilsk Nickel. Norilsk Nickel does not undertake an obligation
to release any revision to the statements contained in this report.
The information contained in this report shall not be deemed to be any form of
commitment on the part of Norilsk Nickel in relation to any matters contained,
or referred to, in this report. Norilsk Nickel expressly disclaims any liability
whatsoever for any loss howsoever arising from or in reliance upon the
contents of this report.
Certain market information and other statements in this report regarding the
industry in which Norilsk Nickel operates and the position of Norilsk Nickel
relative to its competitors are based upon information made publicly available
by other metals and mining companies or obtained from trade and business
organizations and associations. Such information and statements have not
been verified by any independent sources, and measures of the financial or
operating performance of Norilsk Nickel’s competitors used in evaluating
comparative positions may have been calculated in a different manner to the
corresponding measures employed by Norilsk Nickel.
This report does not constitute or form part of any advertisement of securities,
any offer or invitation to sell or issue or any solicitation of any offer to purchase
or subscribe for, any shares in Norilsk Nickel, nor shall it or any part of it nor the
fact of its presentation or distribution form the basis of, or be relied on in
connection with, any contract or investment decision.

GLOSSARY OF TERMS

Abbreviation Term
bn Billion
CAM Cathode active material
CAPEX Capital expenditure
EGCSA Exhaust Gas Cleaning Systems Association
EV Electric vehicle
FeNi Ferronickel
HPAL High-pressure acid leaching
IMIP Indonesia Morowali Industrial Park
IRR Internal rate of return
JV(s) Joint venture(s)
kt A thousand tonnes
ktpa A thousand tonnes per annum
LFP Lithium iron phosphate battery
LME London Metal Exchange
Mt Million tonnes
NCA Nickel cobalt aluminium battery
NCM Nickel cobalt manganese battery
NEV New energy vehicles (battery electric and plug-in hybrids)
Ni Nickel
NiMH Nickel metal hydride battery
NiSO4 Nickel sulphate
NPI Nickel pig iron
RKEF Rotary kiln furnace
SHFE Shanghai Futures Exchange
Mwmt A million wet metric tonnes
Y-o-Y Year-on-year
YTD Year-to-date

11
17 November 2019

Commodities | Strategy
Macro Drivers and

Global
Financial Flows

Tom Kendall
thomas.kendall@icbcstandard.com

www.icbcstandard.com

This is a marketing communication which has been prepared by a trader, sales person or analyst of ICBC Standard Bank Plc or its affiliates and is provided for informational purposes only. It is
not an offer or solicitation to buy or sell any security, commodity or other financial instrument, or to participate in any particular trading strategy. ICBC Standard Bank or its affiliates may from
time to time have long or short positions in financial instruments referred to in this material. The material does not constitute, nor should it be regarded as, investment research.
ICBC Standard Bank | Global

Macro drivers and financial flows

Trade tariffs drag on economy but asset prices up again
The year 2019 will have been one of the oddest in recent times in terms of flouting
perceived norms and correlations. Very few econometric models would have
predicted global equities and gold would both rally by 18% over the same 10-month
period, indices of emerging market bonds would rally by 12.5%, and the US dollar
would firm, all against a backdrop of increased tariffs on an estimated $735 billion of
US-Chinese trade.

Year-to-November performance – Nickel and Palladium fundamentals dominate

60%
50%
40%
30%
20%
10%
0%
-10%

Source: Bloomberg, ICBC Standard Bank

At the heart of the apparent contradictions are flows in investment capital, driven by
further easing of already ultra-loose global monetary policy. The estimated total
notional of sovereign and corporate debt with negative yields touched $17,000,000
million ($17 trillion) in September, having more than doubled since the start of the
year. That, in essence, explains the renewed appeal and reduced opportunity cost of
holding of gold.

$18,000,000
$16,000,000
$14,000,000
Market value, US million

$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$0
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Bloomberg Barclays Global Negative Yielding Debt
Source: Bloomberg

Further monetary easing by both the US Federal Reserve and the ECB have further
stimulated equity prices, and with no inflation acceleration to speak of, bonds
remain attractive in diversified portfolios too.

But potentially troubling signs in underlying economic activity in the US, Europe and
Asia have increased since the middle of the year.

13
ICBC Standard Bank | Global

That has been reflected in the relative underperformance of the copper price, down
almost 3% over the course of the year so far. That underperformance only emerged
from April/May onwards once the US administration moved to increase tariffs on
$200 billion of Chinese goods to 25%.

In contrast, the standout bullish performances of both nickel and palladium have
been based on distinctive fundamental drivers. There certainly has not been a
concerted move back into commodities as an asset class.

Investors’ cut length in gold after a strong run, less appetite for WTI or copper

80
70
60
50
40
30
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Combined Net Investor Positioning (US$ bn) in Gold, Copper and WTI Futures

Source: CME, CFTC, Bloomberg, ICBC Standard

The divergence in investor flows and price performance across commodities is likely
to continue for the remainder of this year and through at least Q1 2020.

A partial agreement on US-China trade would likely trigger further covering of short
positions in copper, though we think it would require much more than that to see
fresh length established. Nickel remains vulnerable to a much deeper correction in
price – perhaps back to the $14,000 area – whereas palladium remains
fundamentally in deficit and is likely to make new highs above $1,800.

FX markets – dollar will continue to surprise

Currency forecasting is a thankless task but it is notable how persistent (and wrong)
the consensus has been for the US dollar to weaken. In January, the consensus of
forecasts collated by Bloomberg was for euro/dollar to strengthen to 1.19 (at the
time EUR was trading around 1.14). By the end of Q3, however, the euro had lost
further ground, falling below 1.10 for the first time in two years.

Dollar slowly strengthening, with hiccups around FOMC meetings

106 13
12
103
11
100 10
97 9
8
94 7
91 6
5
88
4
85 3
янв.16 янв.17 янв.18 янв.19

DXY Index Volatility_30d (rhs)

Source: Bloomberg, ICBC Standard

14
ICBC Standard Bank | Global

Markets have continued to focus on the absolute level of US rates and the likelihood
or otherwise of the Fed cutting rates, and those expectations have fluctuated
considerably throughout the year. At the end of April, the market was anticipating
the Federal Funds rate would hold rates steady at 2.00% to 2.25% through to year-
end. There was very little expectation that the Fed would have cut by 50 bps.

Changing expectations of Fed Funds rate in December reflect economic doubts

100

80

60

40

20

0
июн.19 июл.19 авг.19 сен.19 окт.19 ноя.19

Probability of Hike Probability of No Change (1.5-1.75)

Probability of Cut

Source: Bloomberg

Why then has the dollar not weakened? It seems forecasts often overlook the euro
side of the coin –Italy has barely avoided recession and German GDP has been sliding
rapidly. In terms of expectations, the US economy has consistently over-delivered
relative to Europe. In absolute terms, it is still the fastest growing advanced
economy.

US growth has exceeded expectations that had become too bearish

200
US outperformance vs.
150 expectations
100

50

-50

-100

-150 US underperformance vs. expectations

янв.17 июл.17 янв.18 июл.18 янв.19 июл.19
Spread between US and EM surprise indices
Spread between US and EUR surprise indices
Source: Citi, Bloomberg, ICBC Standard

The ECB has also eased this year and the yield advantage that US Treasuries offer
over comparable German and Japanese bonds has remained broadly stable.

15
ICBC Standard Bank | Global

Treasury yields still very attractive relative to Japanese and European paper

3.25
3.00
2.75
2.50
2.25
2.00
1.75
1.50
янв.17 июл.17 янв.18 июл.18 янв.19 июл.19

US 10yr - German 10yr US 10yr - Japanese 10 yr

Source: Bloomberg, ICBC Standard

There is an old adage that “capital goes where it feels welcome”. An ECB deposit
rate that was cut further into negative territory by the outgoing president is not
exactly heart-warming for investors or savers.

Draghi left the ECB on a dovish note, 5 ½ years of negative rates and counting

3.50
ECB Depo Rate
3.00
2.50
2.00
1.50
1.00
0.50
0.00
-0.50
-1.00
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: ECB, Bloomberg

So relative dollar strength has been in tune with the economic and policy backdrop.
Funds have been running net short euro positions for the last 18 months or so. If it
were not for the political intransigence on trade, we would be confident in
forecasting that to continue. On balance, we think partial resolution of the US-China
trade dispute will come before either economy slows much more than they have so
far, in which case the dollar is likely to continue to outperform.

No macro reason for investors to turn bullish EUR at present

200 1.45
150 1.40
100 1.35
50 1.30
0 1.25
-50 1.20
-100 1.15
-150 1.10
-200 1.05
-250 1.00
2012 2013 2014 2015 2016 2017 2018 2019

Net Investor Positioning EUR Curncy (rhs)

Source: CME, CFTC, Bloomberg, ICBC Standard

16
ICBC Standard Bank | Global

US consumers are still spending but exports slump

US consumer spending has been resilient, with confidence supported by rising

incomes, low interest rates, and ebullient equity markets. There is nothing like the
S&P 500 index pushing to fresh highs to bolster personal consumption.

Consumer confidence holding strong, supported by rising incomes

120
160
110
140
100
120
90
100
80 80

60 70

40 60

20 50
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Conf. Board Consumer Confidence Univ Mich Consumer Sentiment (rhs)

Source: Conference Board, University of Michigan, Bloomberg, ICB C Standard

Consumer spending supporting US GDP in face of manufacturing pressures

6
4
2
0
-2
-4
-6
-8
-10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Personal Consumption QoQ US GDP QoQ

Source: US BEA, Bloomberg, ICBC Standard

That has helped to moderate the slowing of US headline GDP but cannot offset the
underlying cracks in manufacturing activity. Inventories have been rising, net exports
have not improved and the ISM new orders diffusion index has slumped – touching
50… the boundary between contraction and expansion.

Rising inventories have masked a concerning slide in exports

200 -300
150
-400
100
50 -500
0
-600
-50
-100 -700
-150
-800
-200
-250 -900
2003 2005 2007 2009 2011 2013 2015 2017 2019

Change in Private Inventories Net Exports (rhs)

Source: Bloomberg

17
ICBC Standard Bank | Global

So the Federal Reserve has to continue to juggle strong employment and rising
incomes with low inflation and slowing manufacturing and exports.

ISM new orders at four year low and at risk of contracting

70 30
25
65 20
15
60
10
5
55
0
50 -5
-10
45 -15
2012 2013 2014 2015 2016 2017 2018 2019

ISM New Orders Output-Inventory (rhs)

Source: ISM, Bloomberg, ICBC Standard

As Fed Chair Jerome Powell noted in October: “weakness in global growth and trade
developments have weighed on the economy and pose ongoing risks”.

Pace of wage growth has been tempered but is still robust

5.0 4.0%
4.5
3.5%
4.0
3.0%
3.5
3.0 2.5%
2.5
2.0%
2.0
1.5%
1.5
1.0 1.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Atlanta Fed Wage Growth Tracker (Index) Average Hourly Earnings (YoY, right axis)

Source: Atlanta Fed, US BLS, Bloomberg, ICBC Standard

The tricky part for the Fed is, of course, to judge the lag between cutting its headline
rate and the effect on economic activity, and how large that effect will be. Like the
Fed, markets are waiting for some concrete progress in trade talks. The indications
seem to be that discussions are moving in a positive direction. Our expectation is
that a first phase of agreement will be in place shortly, possibly before the end of the
calendar year and more certainly before the end of the Chinese lunar year.

If that is the case then we would expect US manufacturing activity and exports to
start to rebound during Q2, once excess inventories have been drawn down.

There have, though, been false dawns before in the long-running trade dispute and if
the current optimism turns out to be misplaced, and trade continues to suffer, then
the global macroeconomic outlook for the first half of 2020 could turn considerably
darker.

18
ICBC Standard Bank | Global

China – strength at home

For China too, we are erring on the positive side. Trade frictions have clearly had an
impact on manufacturing but targeted easing of monetary and fiscal policy has so far
prevented growth from decelerating too quickly, aided by a 7% depreciation in the
Renminbi during the course of Q2 and Q3.

Money supply growth has stabilised

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

M1 Growth YoY Nominal GDP YoY

Source: PBoC, China NBS, Bloomberg, ICBC Standard

As we noted in our previous report, the squeeze on non-bank lending has eased, and
bank lending has taken up the slack, increasing by 7% year on year over the January
to October period.

Non-bank lending in a more neutral stance, with banks taking up the slack

3,500 2100
3,000 1800
2,500 1500
2,000 1200
1,500 900
1,000 600
500 300
0 0
-500 -300
-1,000 -600
2012 2013 2014 2015 2016 2017 2018 2019

New Bank Loans (RMB bn) Combined Trust & Entrust Loans (RMB bn, rhs)

Source: PBoC, Bloomberg, ICBC Standard

Small and medium sized private companies have become more optimistic on the
outlook in recent weeks, as reflected in the Caixin PMI survey. The new orders
component of the official PMI series also bounced in September, even accounting for
inventories, though no one would claim that activity is really buzzing. In contrast, the
headline NBS manufacturing PMI (more representative of SoEs and larger
manufacturers) has continued to slide and industrial production growth of 4.7% yoy
in October fell well below expectations.

19
ICBC Standard Bank | Global

Mixed messages in October: trade optimism not shared by larger companies

53.0

52.0

51.0

50.0

49.0

48.0
2016 2017 2018 2019

NBS Manufacturing PMI Caixin Manufacturing PMI

Source: Caixin; Bloomberg

On the brighter side, consumers seem largely insulated from the trade tensions.
Business conditions reported by retailers remain strong, consumer confidence
appears to be robust, and strong housing sales and rising prices have supported
activity in the construction sector.

Strong recovery in construction activity as domestic sentiment improves

220
200
180
160
140
120
100
80
60
2012 2013 2014 2015 2016 2017 2018 2019

Construction Sales (trend) Construction Starts (trend) SA SA

Source: China NBS, Bloomberg, ICBC Standard

The one prominent area of consumption weakness remains the auto sector, where
on a year on year basis sales are still lagging behind 2018.

Nevertheless, the pace of contraction has continued to slow and inventories of

unsold new vehicles have been substantially reduced by manufacturers and
dealerships. Sales of larger vehicles have also rebounded. In aggregate, it looks very
much like the worst is now behind the Chinese vehicle sector.

The auto industry has clearly turned a corner

3.0 40%

2.5 30%
million vhicles, SA

2.0 20%

1.5 10%

1.0 0%

0.5 -10%

0.0 -20%
2011 2012 2013 2014 2015 2016 2017 2018 2019

YoY % 3mma (right axis) China - Passenger Vehicle Sales

Source: China Automotive Information Net, Bloomberg, ICBC Standard Bank

20
ICBC Standard Bank | Global

Nickel investor positioning

LME investor flows made a sharp U-turn in June as news of the suspension of
processing at Vale’s Onca Puma ferronickel plant was confirmed. With money
market managers having been running the largest net short position for several
years (partly due to trade war concerns), the nickel price was ripe for a short-
covering rally.

Investment flows reverse course on Brazilian and Indonesian supply news

$19,000 30
$18,000
$17,000 20
$16,000
10
$15,000
$14,000
0
$13,000
$12,000 -10
$11,000
$10,000 -20
янв.18 апр.18 июл.18 окт.18 янв.19 апр.19 июл.19 окт.19

Ni 3m PRICE MM NET (k lots, rhs)

Source: LME, Bloomberg, ICBC Standard,

Strong stainless steel demand data added to the pace of short covering but it was
not until stories emerged in July about Indonesia potentially bringing forward the
ban on unprocessed nickel ore that speculators in China began to contribute to the
buying flow in size.

SHFE long positioning surged – now ripe for a reversal

160,000 rapid build in 1,000

150,000 new length 900
140,000
130,000 800
120,000 700
110,000
100,000 600
90,000 500
80,000
400
70,000
60,000 300
янв.16 июл.16 янв.17 июл.17 янв.18 июл.18 янв.19 июл.19

SHFE Front Month NICKEL Aggregate Open Interest (rhs, k lots)

Source: SHFE, Bloomberg, ICBC Standard

Concerns about an acceleration of the Indonesian ore ban grew through August and
were confirmed by the Indonesian Mineral Resources Minister on 30 August. Not
surprisingly, that saw further rapid increases in open interest in Shanghai futures
contracts, while volatility surged.

21
ICBC Standard Bank | Global

Volatility returns - no-one trades nickel for a quiet life

45

40

35
%
30

25

20
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

3rd month nickel implied vol

Source: Bloomberg

In addition to the financial flows, LME forward spreads also rapidly reacted as traders
and consumers reacted to the potential future supply side pressure. The 6-18 month
spread tightened from -$300/t to almost $200t in the course of two months as
withdrawal of metal on warrant in LME warehouses accelerated.

Spreads jump as LME stocks collapse

400 500
350 400

300 300
200
250
100
200
0
150
-100
100 -200
50 -300
0 -400
янв.12 янв.13 янв.14 янв.15 янв.16 янв.17 янв.18 янв.19

LME On Wrnt Nickel (kt) LME Nickel 6m-18m

Source: LME, Bloomberg, ICBC Standard

Those initial moves were a little overdone but with the re-opening of China’s import
“arb” we are unlikely to see a rapid rebuild of LME inventories any time soon.

SHFE – LME “arb” re-opening into year end

1,000
800
600
400
200
0
-200
-400
-600
-800
-1,000
2016 2017 2018 2019
3Mth Nickel "arb" US$ 10d MA
Source: SHFE, LME, Bloomberg, ICBC Standard

22
ICBC Standard Bank | Global

Disclaimer
This is a marketing communication which has been prepared by a trader, sales person or analyst of ICBC Standard Bank Plc, or its affiliates (“ICBCS”) and is provided for
informational purposes only. The material does not constitute, nor should it be regarded as, investment research. It has not been prepared in accordance with the full legal
requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Additional information with respect to any security, commodity or other financial instrument, referred to herein may be made available on request. This material is for the general
information of institutional and market professional clients of ICBCS and should not be considered to be investment advice. It does not take into account the particular investment
objectives, financial situation or needs of individual clients. The information, tools and material presented in this marketing communication are provided to you for information
purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities, commodities or other financial instruments, or
to participate in any particular trading strategy, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action.
This material is based on information that we consider reliable, but ICBCS does not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to
its fitness for the purpose intended and it should not be relied upon as such. The information and opinions contained in this document were produced by ICBCS as per the date
stated and may be subject to change without prior notification. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavour to update
the material in this report on a timely basis, but regulatory compliance or other reasons may prevent us from doing so.

ICBCS or its employees may from time to time have long or short positions in securities, commodities, warrants, futures, options, derivatives or other financial instruments referred
to in this material. ICBCS does and seeks to do business with companies covered in this communication. As a result, investors should be aware that ICBCS may have a conflict of
interest that could affect the objectivity of this communication. Investors should consider this communication as only a single factor in making their investment decision.

None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written
permission of ICBCS. All trademarks, service marks and logos used in this communication are trademarks or service marks or registered trademarks or service marks of ICBCS.

Information and opinions presented in this communication were obtained or derived from sources ICBCS believes are reliable, but ICBCS makes no representations as to their
accuracy or completeness. Additional information is available upon request. ICBCS accepts no liability for loss, either directly or indirectly, arising from the use of the material
presented in this communication, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to ICBCS.

The services, securities and investments discussed in this material may not be available to nor suitable for all investors. Investors should make their own investment decisions based
upon their own financial objectives and financial resources, and if necessary, should seek professional advice. It should be noted that investment involves risk, including, but not
limited to, the risk of capital loss. Past performance is no guide to future performance. In relation to securities denominated in foreign currency, movements in exchange rates will
have an effect on the value, either favourable or unfavourable, of such securities. Some investments discussed in this marketing communication may have a high level of volatility.
High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment.
Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment, and in such circumstances, you may be required to pay more money to
support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid for such investments may be used as part of that income yield. Some
investments may not be readily realisable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the
value, or risks, to which such an investment is exposed.

In Europe, this communication is distributed by ICBC Standard Bank Plc. 20 Gresham Street, London EC2V 7JE which is authorised by the Prudential Regulation Authority (“PRA”)
and regulated by the PRA and the Financial Conduct Authority (“FCA”), and is provided to Professional Investors only.

In Hong Kong, this communication is distributed by ICBC Standard Bank Plc, Hong Kong Branch, and is intended solely for use by Professional Investor (as defined in the Hong Kong
Securities and Futures Ordinance and its subsidiary legislation) clients and prospective clients of members of ICBC Standard Bank Plc Group. This communication may not be relied
on by retail customers or persons to whom this communication may not be provided by law. All enquiries by recipients in Hong Kong must be directed to an ICBC Standard Bank
Plc, Hong Kong Branch contact. ICBC Standard Bank Plc, Hong Kong Branch is a fully licensed bank under the Banking Ordinance and is a registered institution under the Securities
and Futures Ordinance in Hong Kong. Any investments and services contained or referred to in this presentation may not be suitable for you and it is recommended that you consult
an independent investment advisor if you are in doubt about such investments or investment services.

In Singapore, the provision of Financial Advisory Services is regulated under the Financial Advisers Act (Cap. 110). Accordingly (and where applicable), this material is provided by
ICBC Standard Bank Plc, Singapore Branch pursuant to Regulation 32C of the Financial Advisers Regulations. The material contained in this document is intended solely for
Accredited Investors, Expert Investors, or Institutional Investors, as defined under the Securities and Futures Act (Cap. 289) of Singapore. Recipients in Singapore should contact an
ICBC Standard Bank Plc, Singapore Branch representative in respect of any matters arising from, or in connection with this material. ICBC Standard Bank Plc, Singapore Branch is
regulated by the Monetary Authority of Singapore.

If distributed into the United States, this communication is issued by a member of the sales and trading department of ICBCS. Sales and trading department personnel are not
research analysts, and the information in this communication is not intended to constitute “research” as that term is defined by applicable regulations. Unless otherwise indicated,
any reference to a research report or research recommendation is not intended to represent the whole report and is not in itself considered a recommendation or research report.
All views, opinions and estimates expressed in this communication (i) may change without notice and (ii) may differ from those views, opinions and estimates held or expressed by
ICBCS or other ICBCS personnel. This communication is being provided to you without regard to your particular circumstances, and any decision to purchase or sell a financial
instrument must be made by you independently without reliance on ICBCS. Any decision to purchase or subscribe for any financial instrument in any offering must be based solely
on existing public information on such financial instrument and not on this communication. This material is not intended to provide personal investment advice and it does not take
into account the specific investment objectives, financial situation and the particular needs of any specific person. This communication is for informational purposes only and should
not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of ICBCS, or any
of its affiliates. While every care has been taken in preparing this communication, no representation, warranty or undertaking (express or implied) is given and no responsibility or
liability is accepted by ICBCS, its subsidiaries, holding companies or affiliates as to the accuracy or completeness of the information contained herein. All opinions and estimates
contained in this communication may be changed after publication at any time without notice. Any included projections, opinions, assumptions or estimates are for example only,
and they may not represent current or future performance. The information in this communication may not be updated or otherwise revised. Members of ICBCS, their directors,
officers and employees may have a long or short position in the instruments mentioned in this communication or related investments, and may add to, dispose of or effect
transactions for their own account and ICBCS may perform or seek to perform advisory or banking services in relation thereto. This communication is not intended for the use of
private or retail customers. Any communication may be inconsistent, and reach different conclusions, with other ICBCS communications. ICBCS is under no obligation to bring such

23
ICBC Standard Bank | Global

communications to the attention of recipients of this information.

In jurisdictions where ICBCS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which
will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements.

Copyright 2019 ICBC Standard. All rights reserved. This communication or any portion hereof may not be reprinted, sold or redistributed without the written consent of ICBC
Standard Bank Plc.

24