(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, June 20 (Reuters) - It's been a record-breaking week for nickel, albeit not the kind to do much for this market's punchy bull narrative.
Tuesday saw the warranting of 19,578 tonnes of metal into London Metal Exchange (LME) warehouses.
This was the largest ever single-day inflow of nickel into the LME system, smashing the previous record of 13,230 tonnes set in March this year.
And, thanks to that deluge of warranting, headline LME stocks of nickel MNISTX-TOT hit an all-time high of 305,970 tonnes.
It's a useful reminder that markets do not miraculously shift from surplus to deficit conditions at the flick of a switch.
While there is plenty of evidence that the global nickel market is steadily tightening thanks to the Indonesian ban on nickel ore exports, the process will be slowed by the legacy stocks that have accumulated over the past few years.
Some of which have just turned up in LME sheds.
Tuesday's stocks surge was split between three locations: Singapore (8,304 tonnes), Rotterdam (7,098 tonnes) and Johor in Malaysia (4,176 tonnes). The warrantings came in a mix of full-plate cathode, briquettes, bagged and unbagged, and 50mm cut cathode.
Stocks of the latter, by the way, now total 144 tonnes, which is the highest level of exchange inventory for this premium product since June 2003. In fact, there hasn't been any registered nickel in this shape at all since April 2012.
There has been speculation that this record inflow was connected to the loss of appetite for collateral financing in China in the wake of the Qingdao port scandal. [ID:nL2N0OT0QS}
However, the geographical breakdown of the warranting, particularly the heavy activity at Rotterdam, suggests otherwise.
More likely is that the Tuesday surge resulted from a physical delivery on the prime June prompt date by the large short position that had graced the LME's futures banding report for many weeks.
Where the Qingdao ripple effect is a more plausible explanation is the recent flurry of re-warranting activity at Johor, where the ratio of cancelled tonnage has slipped to 43 percent from over 50 percent a month ago.
The "Johor shuffle", the high-volume movement of metal between live and cancelled warrant categories, has been a defining feature of this LME location for a long time and is widely believed to be tied to Chinese shadow financing.
SPREADS EASE, PRICE DOWN
The net result of both stocks arrivals and re-warranting action is that LME open tonnage is also at a record high above 190,000 tonnes.
Unsurprisingly, this boost to the LME contract's physical liquidity pool has caused any lingering tightness at the front end of the LME curve to dissipate.
The benchmark cash-to-three-months period CMNI0-3 was valued at $78-per tonne contango at Thursday's close. A month ago the spread was trading in small backwardation.
The impact on outright prices has been more muted but after the excitement of mid-May, when three-month metal hit a 27-month high of $21,625 per tonne, a lot of the fizz had already gone out of the nickel market anyway.
The price has gone into drift mode since late last month and is currently trading around $18,550.
That's because a lot of the hot investment money has also departed with volumes and market open interest markedly declining. The latter MNI-MOI-TOT has fallen from close to 320,000 lots at the height of the May mayhem to just under 290,000 lots, taking it back to early-April levels.
This is all part and parcel of the current trading climate on the LME. Lacking a unifying theme, speculative money is playing the divergence game via relative-value trades between metals or the occasional "all-aboard" rush into the next hot thing.
Nickel, it seems, has dropped out of vogue in favour of zinc, this month's hot market, with the zinc price hitting a 16-month high.
Not that nickel's bull story has gone away.
Indonesia shows no signs of relaxing the ban on exports of unprocessed minerals, meaning no resumption of flows of nickel ore to China's giant nickel pig iron (NPI) sector.
The impact is already clear to see in the monthly statistical updates from the International Nickel Study Group (INSG).
The global refined market is still assessed as being in surplus, but only just.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on refined nickel market balance (INSG): link.reuters.com/ved32w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The most recent INSG bulletin, covering the month of April, pegs that month's surplus at just 1,900 tonnes. The cumulative January-April surplus has shrunk to 12,550 tonnes from 51,040 tonnes in the same period of last year.
All of which supports a consensus view that the trickle-down effect of the ore ban on Chinese NPI production is now starting to happen.
Here too, though, stocks of nickel ore at Chinese ports are slowing the process.
And even once those are drawn down, legacy stocks of refined metal will slow the translation of statistical supply-usage deficit into commercial market deficit.
But the process looks, for now at least, unstoppable, barring an unlikely volte-face by the Indonesian authorities.
And there are still plenty of bulls betting on nickel's upside. It's just that they're doing so by buying call options, a part of the market where both open interest and price targets are still rising.
At the end of April there were 200 lots of market open interest on the December 2014 $30,000 strike price. As of yesterday there were 2,050 lots on the same strike. Moreover, the options "heat map" <0#MNIZ4+> is warming up all the way up to that big number.
At some stage those options are going to act as a magnet on the price. But that will be the time when LME stock drawdowns rather than arrivals will be grabbing the headlines.
Until then, there's always zinc!
(Editing by David Evans)