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Technical drivers
The LME nickel price is down 0.5% so far this morning, Thursday February 27, amid continued pressure in the base metals caused by the risk-off mood outside China. This is driven by the spread of the Covid-19 illness outside of mainland China. US President Donald Trump's conference yesterday failed to shore up sentiment. The S&P 500 is down nearly 7% so far this week, its worst performance since December 2018. Nickel and the other base metals are more resilient because they already had priced in a U-shaped recovery in the global economy. This is reflected in the extremely negative spec positioning on the LME. The LME cash/three month spread is in a large contango of $72.50 per tonne this morning, albeit slightly in from $94 per tonne at the close of February 24. This could signal some short-covering. LME stocks - at 229,680 tonnes as of February 26 - have surged by roughly 33,000 tonnes or 17% so far in February and nearly 87,000 tonnes or 54% so far this year. LME inflows in February are significant in historical terms. This clearly shows a weakening of the fundamental picture. SHFE stocks - at 35,945 tonnes as of February 21 - have barely moved so far this February (-1,000 tonnes) and so far this year (-1,500 tonnes or 4%). In the physical market, Chinese nickel premiums increased in the week to Tuesday February 25, along with one in the United States. But European premiums remained flat, near a perceived bottom, sources told Fastmarkets. Seasonal patterns typically turn negative for the LME nickel price in March. As our chart of the week shows (see below), the median monthly return of LME nickel in March over 2002-2019 is -1.9% compared with +6.2% in January and +3.3% in February. As well, the downside tends to be greater. Fundamentals The World Bureau of Metal Statistics (WBMS) estimated the refined nickel market was essentially balanced in the whole of 2019 (i.e. in a deficit of 2,000 tonnes) after a deficit of 99,000 tonnes (4% of annual consumption) in 2018. Last year, global refined output grew by 7% while global refined apparent usage increased by a smaller 2.7%. The International Nickel Study Group (INSG) pegged the refined nickel market in a 30,000-tonne deficit in 2019 compared with a deficit of 145,000 tonnes in 2018. Fastmarkets analysts revised their 2020 forecast deficit to 5,000 tonnes from 40,000 tonnes as a result of weaker demand trends caused by the Covid-19 outbreak. Conclusion The LME nickel price has failed to rebound in February because macro fears continue to dominate and fundamental dynamics have weakened meaningfully. We think that LME nickel will continue to struggle in March despite policy easing from China. In the absence of clear signs of a successful containment of Covid-19, we expect market participants to continue to reduce their long exposure to nickel (and other base metals), pressuring nickel prices lower. Trading strategy We do not have any trading positions in our hypothetical trading book. Chart of the week  |
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All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations. |
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