METAL BULLETIN RESEARCH: Why nickel could outperform in 2013

This year, nickel has been a shocker, losing 30.4% of its value in the space of six months between February and August. But Metal Bulletin Research sees reasons why nickel could be a top performer in 2013.

Let’s face it. In terms of its price performance, nickel has had a shocker this year.

From peak to trough, the metal lost 30.4% of its value in the six months between February and August, bottoming out at a two-year low of $15,190 per tonne. No other base metal sunk so far, so fast.

Copper, for example, only retreated 16.2% over the same period, and aluminium, lead and zinc were down by about 20%.

But nickel prices have rebounded somewhat, hitting $17,000 per tonne at the start of December, and we think there is more to come.

Metal Bulletin Research’s current forecast for nickel in 2013 is for cash prices to average $19,750 per tonne. 

By comparison, Metal Bulletin’s Apex analysis of analysts price predictions suggestsd an average closer to $19,000 per tonne for next year, and about $20,500 per tonne in 2014.

So there is a consensus of opinion expecting prices to rise from here, even though a surplus market is also widely anticipated going forward.

While MBR is not on its own in forecasting a recovery in nickel prices,
we are in the bullish camp it seems, since our price model shows a steeper trajectory. 

We are comfortable with this, as nickel has a track record of overshooting consensus expectations, in both directions. And history tells us that when nickel prices get directional, they don’t hang around.

There are some important reasons why we think nickel may prove to be the dark horse of 2013, and it’s not so much about fundamentals – more about sentiment, shifting perceptions, the forces of liquidity, technicals and stock management strategies.

Wall of supply
First, nickel has got oversold in anticipation of a wall of new supply that is coming. There are a lot of short positions in the market – understandably too, as “sell nickel” has probably been one of the trades of the year.

But these shorts will need to be covered at some point. We have already seen spells of short covering, including throughout much of the second half of November, if the sharp drop in LME open interest is a guide. The view that the scale of supply disruptions and disappointments may spring an upside surprise has been a key factor triggering the recent short covering, as there is a real risk that the oversupply in the next 6-12 months will not be as severe as previously thought.

When this view gains critical mass, we’ll see nickel rerated and we’ll look back at 2012 and say nickel overshot on the downside this year – and all volatile, illiquid, speculative markets like this overshoot at the top and bottom. Remember 2007.

Cyclical upswing is coming
Second, there’s plenty of investment and speculative money on the sidelines waiting to go into commodities. All industrial commodities are naturally cyclical and, when this cycle turns, investors will shift to the cyclicals for the upswing. It may not be the most spectacular up-swing of recent times, as there are plenty of headwinds, but it will be an upswing nonetheless.

China’s economy is the key trigger here. And there are already plenty of indicators that suggest China’s economic slowdown has hit bottom. If the euro crisis recedes and the USA avoids falling off its own fiscal cliff, then the demand outlook for next year may not be so bad after all. After that, 2014 will be even better, and this will be priced in earlier, helping to boost prices in the latter half of next year, especially if restocking picks up in earnest by then too.

Surplus doesn’t always mean lower prices
We still forecast a nickel surplus in 2013, although we have lowered that surplus in a recent review of our assumptions, to 14,000 tonnes, from 42,000 tonnes previously. But the traditional inventory-price relationship has broken down somewhat in recent years, so a surplus doesn’t necessarily mean lower prices, because there is now financial demand to mop up the excess metal.

For more price forecasts, outlook and analysis on the global non-ferrous and ferrous markets, visit the Metal Bulletin Research website, www.metalbulletinresearch.com.