The LME three-month nickel price peaked at $12,850 per tonne on the morning of Monday July 1, its highest since April and an increase of more than 9% from a low of $11,605 per tonne on June 7.

Despite a 2.6% price drop this afternoon, the price has enjoyed fresh support in recent weeks.

The nickel premium in Shanghai also jumped in June, topping out of $350-410 per tonne on a cif basis on June 18, up nearly 70% in a week, with Fastmarkets’ cif Shanghai premium most recently at $340-370 per tonne on June 25.

Despite surging prices, the physical market picture for nickel looks loose going into the second half of 2019.

Demand for nickel looks to be growing, with Japanese trading company Sumitomo Corp estimating that global demand will grow at 3.4% in 2019.

But the company, which is connected to major nickel producer Sumitomo Metal Mining also predicts that supply will grow at a faster 5.5% yearly rate to 2.29 million tonnes in the same period.

And statistics from the International Nickel Study Group (INSG) show that the global deficit in refined nickel in January-February 2019 shrank by 13,000 tonnes to 5,700 tonnes from 18,700 tonnes for the same period of 2018, painting a loosening picture for nickel.

But it is on exchanges in London and Shanghai that the tightness is rooted.

LME nickel stocks may stand at 161,658 tonnes as of July 1, their lowest since February 2013, but market sources do not believe that fundamentals have changed quickly enough to facilitate such a rebound.

“This is nothing more than a skillfully constructed bear trap that has worked,” a European trader told Fastmarkets. “There is no explicable fundamental drive for this amount of price movement coming from the physical market.”

Stocks have declined by 57.4% from 380,100 tonnes in November 2017; the market has generally interpreted the steady drawdown as physical demand for refined nickel.

Stocks are held tightly - LME warrant holdings show one holder of 40-49% of holdings, a second at 30-39% of tomorrow/next-day positions and a final member at 50-79% of cash positions.

In China, SHFE nickel cathode stocks, the only SHFE-deliverable nickel grade, were at 20,464 tonnes on Friday last week, down by 52.8% from 43,397 tonnes in November 2017.

Although SHFE stocks have declined at almost the same rate as those on the LME over the same period, supply is much tighter in the SHFE - LME nickel stocks stood at 164,718 tonnes on June 28, a 144,254-tonne difference.

“The strengthening [in the LME three-month nickel price] is significant but there are technical factors driving short-term tightness,” Citi base metals analyst Oliver Nugent said. “The nickel market balance hasn’t got more extreme in last month but a confluence of the physical picture and technical trading has coincided to make it look that way.”

“You’ve got two quite beautifully coinciding pressure points of tightness on both the LME and SHFE right now,” he added.

Shorts caught out
A lack of exchange stocks and a short-term rush of import demand in China triggered a bout of short covering, boosting the metal’s cash price.

The main battle is between one dominant long against several shorts, the LME’s forward bandings report suggests. The data shows the number of market participants holding futures positions as a percentage of market open interest.

Short positions have been forced to roll their market positions forward to September amid June contract expiry, with open interest on the September prompt date more than triple the open interest for each July and August prompt dates at 42,638 open positions.

Consequently, tightness in the September/three-month spread has emerged, with the spread recently at $15 per tonne backwardation - the tightest across nickel’s forward curve.

The forward curve remains tighter because of the recent buying activity - the benchmark cash/three-month spread is in a $69.50-per tonne-contango, marginally down from $82 per tonne on June 17. Nearby spreads have tightened, with cash/July in a slim $17-per-tonne contango.

Adding to the tightening technical setup in June was a major move in the Chinese physical market, which, while not fundamentally driven, led to the rapid purchasing of nearby futures contracts.

According to speculation last week, a company in China had purchased large tonnages of spot Nornickel full plates while international trading houses had been stockpiling full plates in anticipation of a short-covering outburst.

Chinese nickel futures consequently soared, creating a sudden arbitrage opportunity to import SHFE deliverable units - Russian full plate cathodes - into China. This propelled the cif Shanghai nickel premium up by 69% on June 18 to more than $400 per tonne at the top end.

The arbitrage window has since closed and inflows into China have subsided, with global physical demand flat during what is typically the quieter third quarter.

“[But the shorts] have had their heads handed back to them on a plate basically,” another European trader told Fastmarkets.