Nickel forecast and analysis for Q1 2016

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

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

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Nickel – Be prepared for production cuts and restocking

Summary
Nickel prices dropped below the 2008 low to $8,145 per tonne in November, a level last seen in 2003 when prices were rising after the dot com crash. At these price levels, more than 65 percent of global nickel capacity is believed to be loss-making, so it seems inevitable that prices will have to rebound before too long, otherwise output cuts are likely to force the market’s hand. Short-selling in China and broad-based destocking due to falling nickel prices have led to an extremely oversold market in our view. Stocks are high but even so there is considerable risk on the upside from short-covering and production cuts.

Nickel Chart - LME Nickel 3M 2012-16 - Fastmarkets Metals Report Q1 2016 Nickel table - supply demand of refined nickel

Overall trend – Nickel has been trashed since the early 2014 pre-emptive rally ran out of steam at $21,625. Prices have since fallen 62 percent in a relentless sell-off, taking them deep into the producers’ price curve. Given the outflow of metal from China after the Qingdao Port scandal, which first broke in May 2014, the boom in NPI from 2006, which was providing 450,000 tonnes of nickel units per year units by 2013, apparently displaced huge volumes of refined nickel. Some of this displaced metal flowed into LME-listed warehouses but the rest seems to have flowed to China where it was used for investment/financial purposes instead of being consumed. The acceleration in LME stock rises since May 2014 was some of this metal flowing from China to the LME, with some of the recent drawdown in LME stocks metal moving back to China, again for financing purposes. But LME stocks have jumped again more recently. The net result is that the NPI displaced refined nickel, most of which went into storage; it is the presence of this metal that has driven prices lower. The fact there have not been more cuts seems odd but it would appear that costs of production have been slashed by low oil prices and in some cases by weaker currencies, notably the 117-percent drop in the rouble and the 33-percent drop in the Canadian dollar against the US dollar. Why the higher-cost producers have not buckled yet is a mystery – but even if they are hedged, with prices staying this low for so long, their hedge cover is likely to be being depleted as each month passes.

Supply expected to continue to be reined in – The main producer response to these low nickel prices has been the drop in Chinese NPI production, which Antaike puts at some 18 percent in the first 11 months of 2015. But how much of the production cut has been price-related and how much is due to less availability of higher-grade Indonesian nickel ore is difficult to gauge. Looking forward, we expect NPI production to continue to fall while Indonesian ore stocks get closer to depletion. Low nickel and iron ore prices are also having a negative effect on Philippine nickel ore exports, which fell 4.1 percent in the first 11 months of 2015, despite the cessation of ore exports from Indonesia. Indonesia is building NPI capacity and is exporting some NPI – in the first 11 months of last year, China imported 211,114 tonnes of ferronickel (gross weight) from Indonesia, up from almost zero a year earlier, but low nickel prices are likely to lead to delays in Indonesian NPI projects being commissioned. Despite low prices and rising stocks in Shanghai Futures Exchange warehouses, Chinese imports of refined nickel and ferronickel have soared. This is partially due to stockpiling in anticipation of less domestic NPI production, we think, but also because refined nickel has once again become a popular vehicle for investment/financing purposes. In January-November, refined imports climbed 113 percent and ferronickel imports rose 145 percent. Full-plate Russian cathodes have also been in demand because they are deliverable against short SHFE contracts as well as being popular for financing deals.

Nickel stocks – Given low nickel prices and the likelihood of more cuts if prices stay this low, the medium-term outlook for nickel prices should be brighter generally. Indeed, we expect a supply deficit to unfold, which should give prices some lift although high stocks are likely to dampen any rebound. LME and SHFE stocks amount to 488,697 tonnes, around the high they were all last year. In addition to exchange stocks, stocks exceed one million tonnes, according to estimates, equivalent to around half a year of consumption. This is likely to cushion the impact on prices when a supply deficit emerges.

Stainless steel demand – Stainless steel demand has suffered – falling nickel prices and anti-dumping legislation have led to lower melt rates – but stainless steel and nickel demand are very sensitive to falling nickel prices so apparent demand will look worse than real demand. The opposite will be true once either nickel prices start to rise or the industry starts to restock – nickel prices are then likely to be hit by a double whammy of a jump in apparent demand as destocking is replaced by restocking. Unsustainably low prices, fund shorts – especially in China – and the potential for restocking at some stage in 2016 suggest nickel prices will see a strong rally. As always, the question is: what will trigger it? In the first quarter we expect a price range of $8,100-10,700.

Nickel chart - nickel stocks v 3m price  - Fastmarkets Metals Report Q1 2016

The inverse relationship between prices and stocks is working well, which is why we are waiting for nickel stocks to start to fall again before getting more bullish.

Nickle Chart - Forward spread  - Fastmarkets Metals Report Q1 2016

The low three-month price has seen the forward curve expand, suggesting there has been some forward buying interest.

Nickel chart - Nickel stocks vs cancelled warrants - Fastmarkets Metals Report Q1 2016

Although the stock rise is bearish, the rise in cancelled warrants suggests stocks will continue to flow out of LME-listed warehouses. Cancelled warrants account for 40 percent of total stocks, up from 28 percent a year ago.

Nickel chart - Nickel stocks as a percentage of annual consuption - Fastmarkets Metals Report Q1 2016

LME nickel stocks are extremely high; what is worse is that total stocks may equal as much as 50 percent of annual consumption. So even when the market swings into a deficit, the upside in prices may be limited.

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