Nickel forecast and analysis for Q2 2016

Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, April 2016.

Below is the nickel report, to download a PDF copy of the full report covering all the metals in pdf form click here.

Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.

Nickel – Set to remain rangebound


Nickel continued to disappoint in the first quarter, falling 3.7 percent after tumbling 42 percent last year. Nickel reached its lowest since 2003, breaking below its 2008 low set during the Great Financial Crisis. Despite a short-covering rally in February, the metal lacked much impetus, principally due to the weak fundamental picture. We believe nickel will remain range-bound between $8,000 and $9,500 in the second quarter, because upward pressure from possible output cuts/stronger demand should be offset by downward pressure from the high level of inventories.

Nickel price chartNickel table - supply and demand of refined nickel

Overall trend – Nickel remained under selling pressure in the first three months of 2016, reaching a low of $7,580 in February. But it benefitted from a positive swing in investor sentiment towards commodities in February stemming from a strong recovery in oil prices as well as expectations of broad-based supply cuts, which resulted in a short-covering rally. But nickel failed to sustain its gains because of the oversupplied nature of the market, as evidenced by rising available LME and SHFE stocks. With net speculative long positions on the LME currently at a relatively high historical level, the likely absence of meaningful supply cuts this year and only a modest recovery in demand lead us to expect the metal to continue to face downward pressure in the second quarter.

Supply remains ample – The bullish nickel story stemming from the Indonesian ore export ban in January 2014 has completely evaporated because supply has proved to be larger than expected. Despite prices remaining below $9,000 in recent months, putting 70 percent of the industry at a loss, no meaningful supply cuts have materialised outside the group of Chinese smelters that agreed at the end of 2015 to cut output by 100,000 tonnes or five percent of total supply in 2016. While the Indonesian export ban should have tightened China’s supply through falling NPI output, Chinese nickel supply has remained sufficient to satisfy demand. In fact, the fall in Chinese NPI production of 80,000 tonnes or 18 percent in 2015 was more than offset by a sharp rise in refined imports, up 172,160 tonnes or 132 percent in 2015, and ferro-nickel imports, up 370,476 tonnes or 131 percent.

Against this backdrop, more supply cuts inside and outside China are needed to affect the market’s supply-and-demand balance significantly and to reduce global stocks. Although some output cuts are possible in the second half of the year, the industry has shown in the past some reluctance to make the cuts necessary to balance the market because producers tend to wait until the last minute before shuttering their operations and because governments such as that of China are supporting domestic producers to maintain social peace. Consequently, we do not expect there will be sufficient supply cuts in 2016, particularly taking into account the fact that lower energy prices combined with weakening mining currencies will continue to push production costs lower and provide producers with some relief.

Stainless steel output could contain downward pressure on nickel – Global stainless production, which accounts for about 65 percent of total nickel demand, could rebound in 2016 after falling 0.5 percent in 2015 to 41.5 million tonnes, according to MEPS. Despite sluggish steel demand growth, as falling international stainless steel prices show, MEPS forecasts worldwide output to increase around two percent this year – a 1.7-percent recovery in Chinese production should follow last year’s two-percent decline, partly due to anti-dumping duties imposed by the EU. While the fall in nickel prices over the past two months was accompanied by destocking, we believe higher prices might prompt stainless producers to restock, which would exert upward pressure on nickel. Still, we acknowledge that a more pronounced slowdown in China, which accounts for about 50 percent of steel production, as well as a further fall in steel prices could result in lower output and therefore constitute key downside risks to global stainless steel output. Our base case scenario echoes that of MEPS – we expect a moderate recovery in global stainless production, which should limit the downward pressure on nickel in the second quarter.

Visible and invisible stocks likely to continue to cap nickel prices – Visible stocks continued to grow in the first quarter. While LME stocks at 431,802 tonnes were broadly flat in the first three months around their all-time high, available stocks (stocks minus cancelled warrants) rose 28,326 tonnes or 10 percent, containing tightness in nearby spreads. SHFE stocks climbed 24,710 tonnes or 51 percent to 73,049 tonnes, confirming the oversupplied nature of the market. In addition to exchange stocks, invisible stocks, which are tied up in financing deals, are believed to exceed one million tonnes, equivalent to around half a year of consumption. Against this backdrop, even though we project a supply deficit of roughly 130,000 tonnes for 2016, the high level of total stocks is likely to prevent the global nickel market from tightening too much, capping any strong price rises.Nickel Chart - LME available stocks vs 3-month price

The steady increase in LME available stocks in the first quarter exerted downward pressure on nickel prices. This could continue in the second quarter.Nickel Chart - Forward spreads verses 3 month price

The forward curve continued to expand in the first quarter amid lower three-month prices, suggesting there has been some forward buying interest.Nickel chart - LME total and available stocks and cancellations

LME stocks slipped 9,540 tonnes or two percent in the first quarter although they remained close to their all-time high. Cancelled warrants fell 37,866 tonnes or 23 percent. So available stocks rose 28,326 tonnes or 10 percent, capping tightness in the cash-threes spread.Nickel chart LME Nickel stocks as a % of annual consumption

LME total nickel stocks are high, corresponding to more than 20 percent of annual consumption. Total stocks (visible and invisible) represent an estimated 50 percent of annual consumption. So a supply deficit in 2016 is unlikely to exert a meaningful upside influence on prices.

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