The London Metal Exchange’s three-month nickel contract closed at $9,335 per tonne ($4.23 per lb) on June 30, a 4% jump from $8,975 per tonne ($4.07 per lb) on June 16.
While inventories of the metal are high, visible stocks have actually dropped in recent months, analysts at the USA-based bank pointed out in a June 29 report. Indeed, supply growth was put at 4.8% for this year, but demand was also estimated to be up by 4% compared with last year.
In addition, the global market is largely in balance, with analysts projecting a 28,000-tonne deficit at the end of 2017 compared to a 41,000-tonne deficit in 2016.
This means that the price drop is likely being driven by market concerns about a large increase in nickel supply, primarily due to the Indonesian government’s decision in January to ease the country’s ore export ban. Yet the government has made it clear that it does not intend to swamp the global market.
Indeed, current export permits indicate that the country might only add an additional 50,000 tonnes of nickel units, approximately 2.5% of global supply, from ore shipments to the global market this year. However, more companies might apply for a resumption of deliveries.
Analysts also noted that Chinese nickel pig iron producers are unlikely to ramp up output to a large extent, even if ore supplies increase, since they are only slightly profitable following the recent price drop.
Meanwhile, in the Philippines, the rejection of anti-mining advocate Regina Lopez as secretary of the country's Department of Environment and Natural Resources in May has raised uncertainty over which policies that she had enacted will remain in place. Lopez’s replacement, Roy Cimatu, is expected to take a more moderate stance on mining, signalling that mine closures could be more pointed than sweeping.
In terms of demand, offtake has been stable, with consumption recording seasonal highs every month between March 2016 and March 2017. Nickel purchases appear to be steady in both China and the rest of the world, the bank said.
However, obstacles particularly in China, have become much more pronounced, with stainless steel production falling by 8.9% year-on-year in May. Analysts said they expect this to increasingly surface in nickel usage numbers.
Fundamentals for nickel are likely to remain subdued, with growing supply and increasingly muted demand easing the tightness in the market. Analysts expect “prices will, at best, stabilise until clarity emerges over output from the Philippines and Indonesia,” they said.
LME nickel prices are expected to end 2017 at $9,494 per tonne ($4.30 per lb), the report said, indicating a decline in the bank's forecast from $12,175 per tonne ($5.52 per lb) previously.
A decline in nickel prices over the past few weeks is largely due to recent developments in Indonesia and the Philippines rather than high inventory levels, according to Bank of America Merrill Lynch.