Nickel’s rally has stalled. The recent highs were being set during upward spikes, which suggested scale-up selling. So it is not surprising that prices have struggled – they ultimately failed to reach the target at $9,795, missing it by $95. Since nickel can be a volatile market, we would not be surprised if prices overshoot on the downside. For now the market is still trending higher but that is being tested now.
We were struggling with the run-up in nickel prices basis the market’s fundamentals so this price pullback is not that surprising. Current supply and demand suggest a supply deficit; International Nickel Study Group (INSG) data for January showed an 8,100-tonne deficit and its forecast for 2016 is for a supply deficit of 49,000 tonnes. Supply is likely to drop 3.5 percent while demand is seen rising 3.8 percent. At face value, that is quite a sizeable deficit but when LME and SHFE (Shanghai) stocks amount to around 500,000 tonnes there is enough stock to cover 10 years of similar deficits. Such a massive stock overhang should cap nickel prices well below levels that encourage idle capacity to be reactivated. The INSG forecast for demand growth may look tame, however, should consumers restock. Restocking phases in stainless steel and nickel can have significant impact on nickel demand.
Unlike many of the other metals where higher prices are likely to prompt a supply response, especially in the case of aluminium, we expect Chinese NPI production to continue to fall – falling output is more a reflection of the lack of higher grade Indonesian ores (now that stockpiles in China have been run down) than the price.
With two-way stock flow continuing, either the market is not in a supply deficit yet or there is still ample stock around outside the LME. Despite the cash-3 months being in contango, stocks inflow is seen on most days. There is little sign of shortage or tightness – the c-3s spread is not that tight at $45-32.5 contango and there are no large holders of nearby metal. Despite a not-too-bullish fundamental picture, the bullish price action that started in February may be a warning of a change in sentiment.
All in all, although NPI output may be falling, which could have a significant impact on supply, there seems no shortage of nickel in the short term. In theory, this is likely to cap the upside on the LME – the recent pull-back in price suggests that is happening.
To conclude with, despite some improvement in the fundamentals and the INSG forecast for a deficit, it is difficult to be bullish for nickel overall, especially when stocks are high and there is still inflow into listed LME and SHFE warehouses. Key now will be where the market finds support and whether the overall upward trend remains intact. With iron ore and steel prices falling in China, other steel alloying metals, such as nickel, may well suffer too.
Source: Fast Markets
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