NICKEL TODAY – Time to abandon ship?

Short Term:
Medium Term:
Long Term:
Resistances:
R1 11,000 Key resistance
R2 11,030 2016 high (August)
Support:
100 9,803
20 10,282
50 10,320
Support:
S1 10,282 20 DMA
S2 9,803 100 DMA
S3 9,803 UTL (purple)
S4 9,000 Important support
S5 8,330 May low
S6 7,550 2016 low
Stochastics:
Legend:

Technical Comment

Momentum is in positive territory but ADX is below 20 – this suggests that the trend in motion is weak

Analysis

  • Nickel is under renewed selling pressure – it is unable to break above strong resistance at $11,000 and its 2016 peak from August. Still, the technical environment remains healthy – prices are above their key DMAs, which bodes well for the near-term outlook.
  • Longer-term view: on the monthly chart, nickel is slightly above its 20 MMA but we now need a break above its year-to-date high to suggest that the bull market will continue.
  • On the upside, nickel’s next challenge is to take out its year-to-date high. On the downside, we will monitor the 20 DMA, a break of which could pressure the metal to its 100 DMA, a break of which in turn could extend the downtrend toward next crucial support at the UTL

Macro drivers

LME nickel has come under some downward pressure since Monday although volumes have been small because China is on holiday all week. We expect thin trading until China returns next week. Current conditions could encourage volatility in nickel and other base metals.

We attribute nickel’s current weakness to profit-taking after the release of the Filipino mining audit last week. Although Manila’s decision to suspend 20 more mining firms (10 are nickel producers) following the suspension of 10 miners (including eight nickel producers) early in July, representing 55.5 percent of domestic output or 230,000 tonnes of contained nickel per year, is significant, we believe it was already priced in by the market. So profit-taking has followed.

The current profit-taking shows up in the fluctuations in the nearby spreads: c/3s is currently at $50.50 contango compared with $47.50 at the start of the week, which could reflect some long liquidation activity. The fall in open interest combined with lower prices tends to corroborate this view.

There is no change in speculative sentiment. The latest LME COTR showed the NLFP rising 10 percent week-on-week to 63,316 lots as of September 23. The NLFP is now up 312 percent in the year to date, indicative of a very bullish sentiment. We will scrutinise today’s data to analyse the extent to which the developments in Philippines have affected speculative behaviour.

Visible inventories remain high while the trajectory of recent months does not suggest a tighter supply/demand balance. LME stocks were last at 361,464 tonnes, down less than two percent in September after little change in August. SHFE stocks – at 110,955 tonnes as of September 30 – were broadly unchanged in September. Still, they are up roughly 130 percent so far this year. Either demand is not strong enough or there is still too much available supply, which is preventing visible stocks from falling. This is consistent with the current weak state of the physical market across most regions.

 Recap of supply/demand balance:

  • According to INSG figures, the global nickel market recorded a deficit of 36,800 tonnes in January-June 2016, in sharp contrast with a surplus of 89,200 tonnes in the corresponding period of last year.
  • The INSG projected a 2016 deficit of 49,000 tonnes at its April 2016 meeting compared with 23,000 tonnes at its October 2015 meeting. But we think the deficit could be larger given recent developments in the Philippines.

Conclusion

We prefer to remain cautious in the near term because we think that tighter Philippines supply is largely priced in by the market so market participants might start to unwind their long positions amid profit-taking.

As well, the tightening of China’s output may be more than offset by stronger Indonesian output, we feel, which would prevent the supply/demand balance from tightening over the rest of the year. But from a technical perspective, a break above the year-to-date high would suggest the rally has further to go. 

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.