Record stock levels keep nickel prices down

In the first half of 2014, nickel prices gained momentum on concerns of supply disruption after the biggest producer Indonesia, introduced a ban on nickel ore exports.

This came as a blessing in disguise for the Philippines, which entered the market soon after the ban and tried to plug the gap by as much as possible – and the result: the anticipated nickel shortage never came, with 2014 ending with a 125,000-tonne surplus. Owing to this, nickel prices which had rocketed by nearly 50 per cent in the first five months of 2014 ended the year just 7 per cent higher.

In 2015, nickel prices have plunged by around 25 per cent as global nickel markets were in surplus of 19,000 tonnes in January-May 2015 with production exceeding apparent demand, according to the latest data released by the World Bureau of Metal Statistics.

Exerting further pressure on prices was data released by the Japanese Ministry of Economy, Trade and Industry which showed output of stainless steel products increased sharply during the month of March this year compared with the last month. Japan’s total production of stainless steel products during the March ’15 was 248,684 tonnes, higher by 7 per cent compared with the output during the previous month.

The country’s stainless steel production during February was 232,415 tonnes, down 7.2 per cent compared with production during the same month a year ago.

Also, huge LME nickel stocks which nearly doubled in 18 months to record highs above 470,000 tonnes in June, despite several recent drawdowns continue to play spoiler for metal.

Concerns about the Chinese construction sector along with tighter credit conditions in China, as credit lines limit investment in infrastructure and property add to the downside.

On the macroeconomic front, Greece debt crisis and fears of Athens leaving the Euro Zone kept investors away from risky assets and hurt metal prices.

Moreover, concerns of US rate hike by the Federal Reserve for the first time in nearly a decade become all the more pronounced given improving labour markets and economic activity in the major consumer. Frequent admissions by the Fed members that the economy is moving in the right direction pushed dollar to 12-year high levels and sent the metal further lower.

However, some respite to the metal was provided after the launch of the Shanghai Futures Exchange nickel contract in March this year. Participants have been shipping Russian material to China, and Norilsk Nickel confirmed at the beginning of this month that it had registered three brands for delivery against the SHFE nickel contract.

Russian exports of refined nickel to China were up 32 per cent in June at 21,668 tonnes from 16,385 tonnes in May. This represents 56 per cent of China’s refined metal imports in June. Also, China’s imports of refined nickel increased by a staggering 250 per cent in June, highest in six years, to 38,545 tonnes compared to 11,014 tonnes in June 2014, in a further sign that the world’s biggest consumer is witnessing a shortfall for its metal demand.

For the coming months, nickel prices will continue to trend lower as Japan’s biggest nickel producer Sumitomo Metal Mining Co reversed its outlook for the global market and predicted output will top demand by 12,000 tonnes in 2015, compared with its April forecast for a 5,000-tonne deficit and a January estimate of a 12,000-tonne shortfall.

Also, the Chinese are going to find their inventories of ore to make nickel pig iron tightening only later this year, thereby brushing off any supply concerns.

However, some respite can be expected as China’s State Reserves Bureau has been trying to cash in on this drop in prices of the metal used to make stainless steel and has been in discussions to buy nickel this month.

From a 2-3 months perspective, LME nickel (CMP: $11,260) prices may trend lower towards $9,700/tonne, while nickel on the MCX (₹719.50) may decline to ₹620/kg.

The writer is Associate Director - Commodities & Currencies, Angel Commodities Broking Pvt. Ltd. Views are personal.