Nickel forecast and analysis for Q3 2016

Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – the latest are Sucden Financial Metals Reports for July 2016.

Below is the nickel report. To download a PDF copy of the full report, please click here.

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Nickel – All eyes on Philippines mining regulation

Summary

Two features stand out on the long-term nickel chart. First, nickel prices appear to have put a base in at a very low level below the 2009 financial crisis low and the 2004-2005 trading range. Second, the rebound to date looks minimal. What the chart does not show is the risk of a significant supply disruption if the new Philippines government clamps down on nickel mining for environmental reasons. Nickel can be very volatile – see the rallies in 2006, 2009, 2010 and 2014. Luckily, stocks are high to dampen any supply shock this time – although ‘dampen’ may turn out to be a relatively ineffective word.

Nickel price chart 2006-2016 - FastMarkets metals report Q3 2016 Nickel table - global supply and demand 2012-2016 - FastMarkets Metals report Q3 2016

Overall trend – The downward trend in nickel looks to be over; a base appears to have formed and an upward trend seems to be starting. Prices may have already rebounded by $2,800 per tonne but the move barely shows up on the monthly chart. One of the surprising aspects of the nickel market over the past year has been the lack of supply responses to ultra-low nickel prices. Even though at times up to an estimated 70 percent of production has been underwater, there have been few output cuts outside of China. In China, low prices and the depletion of Indonesian ore stockpiles have prompted cuts to nickel pig iron (NPI) but high-cost production outside of China has been reluctant to close because many of the higher-cost facilities are relatively new and have been very expensive to build. The fact they are owned by large corporations means they have been able to continue to operate at a loss in the hope that less-well-financed producers would buckle first. It now looks as though Philippine supply may be cut, less because of financial reasons but more for environmental reasons.

New Philippine government could structurally change nickel market – The new government in the Philippines brings with it a new environment minister, Regina Lopez, a known environmentalist who seems to be on a mission to rein in mining, especially open-pit mining. Having come to power on June 30, the government has been quick to act, suspending two nickel mines and has launched an audit of all mining. Manila has warned it would cancel mining projects that are causing environmental harm. The Philippines is the largest exporter of nickel ores, accounting for 23 percent of global supply, so any dramatic shift in the county’s attitude towards mining could have a significant effect. And with mining contributing to around one percent to its economy, a harsh stance may not do too much damage. The speed with which the new government has acted suggests mining is one of its primary targets for action.

A window of opportunity – Exchange stocks of nickel stand at around 480,000 tonnes, equivalent to 25 percent of annual consumption, which is a huge stockpile. Given rising SHFE stocks and two-way LME stock flow, albeit with a downward bias, much of the financed of stock is probably being done with warranted metal, especially in China, which following the Qingdao port scandal in 2014 would seem reasonable. Some reports suggest as much as 500,000 tonnes could be being financed off-market but we are sceptical. If it is, like aluminium, it may well remain off-market. If it were not for the potential supply disruption from the Philippines, then, it would be difficult to be bullish on nickel other than to say that, with prices below the marginal cost of production, a supply response would be seen eventually. Now the supply response may be seen – production cuts in the Philippines may be big enough to draw down stocks in exchange warehouses at a much faster pace than the market currently anticipates. The Philippines produced an estimated 470,000 tonnes of nickel in 2015, which is equivalent to around 24 percent of global consumption of nickel units. So while stocks are high, a meaningful restructuring of the Philippine mining sector that hits production could turn the outlook from subdued to bullish in double-quick time.

Stainless steel production to recover on restocking but… On the demand side, the trends in stainless steel production are all-important. The outlook is quite bright, albeit not for the most robust of reasons. After the fall in nickel prices since mid-2014 led to destocking in stainless steel, it now looks as though rising nickel prices are prompting some stock-building before alloy surcharges likely rise in the months ahead. Needless to say, what is really needed is a pick-up in stainless steel consumption; a look at manufacturing PMI data from recent months leaves little room for optimism, especially because economic and political uncertainty following the Brexit vote and ahead of the US election could weigh on business confidence.

Outlook – We have been bullish on nickel while waiting for a supply response, which has been elusive, but perhaps that is about to change. In the third quarter we expect a range of between $9,000 and $11,400.

Nickel chart - Nickel LME available stocks vs 3-month price - FastMarkets Metals report Q3 2016

The inverse relationship between stocks and price is working again while prices respond to the downturn in LME stocks. Stocks continue to rise in Shanghai, though.

Nickel chart - cash to 3 month spread - FastMarkets Metals report Q3 2016

The cash-to-three months spread has only just started to tighten. The contango has facilitated financing but, with prices running higher and prompting short-covering, the spread may well tighten further.

Nickel chart - LME total and available stocks and cancelled warrants- FastMarkets Metals report Q3 2016

LME stocks dropped 52,236 tonnes or 11.9 percent in the second quarter while SHFE stocks rose 26,224 tonnes. Perhaps a deficit is starting to be felt?

Nickel chart - LME commitment of traders - money managers positions - FastMarkets Metals report Q3 2016

Money managers trading LME nickel have been covering shorts while longs have been getting longer. This is doubly bullish for nickel.