5 Min Read
* LME stocks near record, but much of them not available
* Futures signal shortages developing, draws of stocks
* Ore stocks in China being hoarded after ore prices doubled
By Eric Onstad
LONDON, May 21 (Reuters) - High global stock levels of nickel, while worrying some investors, are unlikely to end a rally that started in January, because some is not available and the rest is not enough to replace lost supplies from Indonesia.
Some of the tonnage has already been set for delivery; some is tied up in financing deals; and some is tightly held by Chinese producers and speculators and will be released only as a last resort, analysts said.
Benchmark nickel prices on the London Metal Exchange (LME) have soared by over 40 percent this year after top exporter Indonesia imposed a ban on unprocessed ore exports, leading to fears of severe shortages.
London Metal Exchange (LME) nickel inventories have increased 7 percent since Jan. 12, when Jakarta slapped on the ban. Some people say the rise proves that worries about scarcity are exaggerated and prices are overcooked.
Nervousness among investors has been reflected in recent volatility on the LME. Benchmark nickel contracts surged last week to a peak of $21,625 a tonne, the highest in 27 months, only to lurch 11 percent lower during the next two days.
On Wednesday, it was down 2 percent at $19,420 at midday.
The fact that LME stocks are still high is not surprising, given that it is only one component of the market, typically used after other sources are exhausted, said analyst David Wilson at Citi in London.
"The LME is pretty much the nickel market of last choice, so you always expect the other areas of nickel to react first, which is exactly what we've been seeing."
Stainless steel producers, which account for about two-thirds of global nickel demand, first seek scrap and then ferronickel before resorting to LME refined stocks, he said.
LME inventories of refined metal MNISTX-TOTAL have piled up during years of surplus, rising 165 percent over the past two years, and reached a record high of 286,674 tonnes in March.
Commerzbank is among those cautious about the high stock levels, pointing out in a recent note that total LME stocks could satisfy global demand for nearly two months and concluding: "The market is pricing in too much imagination at the moment."
So far, headline stocks have barely eroded from the March highs, coming in at 280,020 tonnes on Wednesday, but some of them are not available, and there are also signs that inventories are due to start declining more quickly.
Cancelled stocks, whose owners have notified the exchange they are preparing to take delivery, now account for 43 percent of total stocks and are no longer available.
Also about half of the LME stocks are held in Johor in Malaysia, but it appears that a good deal of that volume is tied up in financing deals, said Colin Hamilton, head of commodities research at Macquarie. "So the availability of LME stocks may be limited."
There are also signals that shortages of LME material are developing based on the futures curve, which is moving towards backwardation, Wilson said. In backwardation, nearby prices are higher than forward ones.
"It's going into a quite steep backwardation in October/November ... pricing in a degree of significant tightness from the middle of H2 (the second half of the year) onwards. You'd expect to see inventory drawing ahead of that."
In addition to the large nickel stocks in LME-approved warehouses, Chinese producers stocked up on ore last year in anticipation of the Indonesian ban and built stockpiles amounting to about 320,000 tonnes by the time the ban was imposed, according to analyst Grant Sporre at Deutsche Bank.
That was enough ore supply to sustain production of nickel pig iron (NPI), an alternative to refined nickel in China, for about eight months, he said.
As the price of nickel ore in China has more than doubled since late February, many players have been hoarding it, expecting even higher levels, analysts and traders say.
"At the moment there's still enough ore, but if you're holding a tonne of ore and someone wants it, you know you're not going to replenish it," Hamilton said.
Smaller NPI producers are already affected, because ore stocks are concentrated in the hands of larger NPI producers such as Tsingshan or traders, Wilson said.
He forecast that LME nickel prices will keep rising to over $30,000 a tonne next year, up more than 50 percent from current levels, as the market moves into deficit in the second half of the year and physical shortages begin to bite. (editing by Jane Baird)