NICKEL TODAY – Test holds, prices work higher again

Short Term:
Medium Term:
Long Term:
Resistances:
R1 10,269 20 DMA
R2 10,440 Sep 09 peak
R3 10,785 Oct 2015 high/HRL
R4 10,900 Recent peak
R5 11,030 High so far
R6 11,566 Long term DTL
Support:
S1 10,269 20 DMA
S2 10,017 SL
S3 9,998 38.2% Fibo
S4 9,906 Channel top
S5 9,750 August low
S6 9,700 May peak
S7 9,680 50% Fibo
S8 9,630 Recent low
S9 8,330-8,245 Apr-May support
S10 7,550 Feb low
Stochastics:Bullish
Legend:

MACD = Moving average convergence divergence
BB = Bollinger band
DMA = Daily moving average
Fibo = Fibonacci retracement line
SL = Support line
HL = Horizontal line
H&S = Head-and-shoulder pattern

Analysis

  • Nickel’s latest rally ran into overhead supply ahead of the August peak and prices have since pulled back to test the quality of underlying support. They found support ahead of the previous dip low and around the 38.2% Fibo of the June-August rally.
  • Overhead supply still seems to dominate ahead of $11,000 per tonne, basis LME three months.
  • We saw the September pullback as consolidation after the powerful gains in May-August so we would not be surprised if prices push higher from here.
  • Basis the monthly chart (not shown), the rally may only have just started. The long-term DTL is at $11,566 per tonne.

Other factors

The c-3s spread is not showing much tightness. It was last at a contango of $58.5-42.5 per tonne. 

With the Philippine supply disruption not price-orientated, reduced Philippine mine production may well tighten the fundamentals considerably although there is still much uncertainty as to how much will be be suspended and for how long. In addition, the market is nervous that some exports of low-grade nickel from Indonesia, which cannot be processed by the new NPI plants in the country, may be allowed. If so, some of China’s NPI producers may restart, which would then further offset any revival in demand for refined nickel. 

Given these uncertainties, perhaps nickel prices will consolidate for a while rather than push ahead. But nickel can be a volatile metal and, if better economic data emerges, users of nickel and stainless steel may well start to restock or put on hedges against their likely future nickel exposure. 

Stainless steel production in China should rise 6.8 percent this year, according to Antaike, while new plants ramp up. Crucial will be whether the extra stainless steel will be needed or if stocks will build up. We are quietly optimistic that China’s economy is turning a corner while government housing and infrastructure projects gather momentum.

Overall, we expect the fundamentals to remain supportive but no shortage is likely given the stock overhang. Still, faced with a supply deficit that requires stocks to be drawn down, it may be that those holding onto stocks will do so more tightly. While there may be stock around, it is not necessarily for sale at today’s price.

Conclusion

We are bullish over the medium term because nickel prices are still very low but, given high nickel stocks, a lack of tightness and only one large holder (30-39 percent) of the nearby positions, we are not necessarily in a hurry to buy. But if a rebound is seen to have legs, funds may well increase exposure again; still, the gross long position is already high. A swing factor would now be whether Indonesia allows exports of lower grade ores again. This seems counter-productive because such a move would probably reduce nickel prices and put the viability of the new NPI facilities that are being built into question.

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