LONDON Nickel stocks held in the London Metal Exchange (LME) warehouse system hit a fresh all-time high of 167,700 metric tons (184,858 tons) on Tuesday.
They have been building relentlessly for over a year now, finally overtaking the previous February 2010 peak of 166,476 metric tons late last week.
This steady accumulation of market surplus has, understandably, weighed on the price of the stainless steel input with three-month metal languishing just above the $16,000-per metric ton level.
None of which should come as a major surprise.
Nickel was picked out by analysts in the Reuters January base metals poll as a likely underperformer.
Only three out of 16 analysts contributing a market balance assessment expected anything other than another year of surplus.
But a median expectation for a 33,500-tonne supply surplus in 2013 is already looking overly optimistic.
And it's not just the quantity of metal accumulating in LME sheds that is challenging the consensus.
It's also the quality and the distribution of the exchange inventory build.
LME stocks of nickel have already risen by 26,010 metric ton so far this year.
That in itself marks a break with normal seasonal patterns.
Nickel's fortunes are inextricably tied to the stainless steel sector because it accounts for around 65 percent of global nickel usage.
Restocking by stainless mills has tended to cause LME stocks to fall over the first part of any year.
But not last year and even less so this year.
Indeed, the only year that has seen a bigger first-quarter build in LME nickel stocks was 2009, a telling reference point since that marked the depths of the post-Lehman global manufacturing contraction.
Something else has changed this year as well.
More and more of the metal that is entering the LME system is doing so in the form of "premium" metal.
LME stocks are normally dominated by "commodity-grade" full plate cathode, which tends to command the lowest physical market premium to the LME cash price.
Back in February 2010, the previous LME stocks peak, full-plate cathode accounted for 87 percent of all the metal in the LME system.
The ratio this time around stands much lower at 71 percent.
Stocks of bagged briquettes now account for 28 percent of the total inventory, compared with just 10 percent back in 2010.
They currently total 47,460 metric ton, the largest amount of this particular type of nickel ever held in the LME system.
Even more unusual has been the arrival of 1,008 metric ton of nickel pellets in the "market of last resort".
The previous maximum holding was just 36 metric tons, which entered the LME system in February 2009 and stayed there until November of the same year.
Also changed is the distribution of LME nickel stocks.
In previous stock surges most of the metal has accumulated in Rotterdam, reflecting the shipping patterns of the world's largest producer of full-plate cathode, Norilsk Nickel. (GMKN.MM)
The Dutch port still accounts for the largest single concentration of metal in the LME system with registered tonnage of 72,210 metric tons.
But there are also significant holdings at Johor in Malaysia (44,292 metric tons, mostly of bagged briquettes), Vlissingen (10,026 metric tons) and Antwerp (10,482 metric tons).
All three are "problem" LME locations, characterized by aggressive trader-warehouser competition and load-out queues.
But "warehouse wars" alone do not explain the spreading distribution of exchange inventory.
How, for example, to explain the 5,412 metric tons of metal sitting in Dubai, an LME location that hasn't held nickel since 2003?
Or the 1,008 metric tons (all pellets) held in Chicago, which last stored nickel warrants in July 2008? Or the 402 metric tons in Detroit, which has never held nickel before?
TIP OF THE ICEBERG
These shifts in the type of metal held in the LME system and the distribution of that metal point to an even greater degree of over-supply than suggested by just the quantity of the stock build.
LME stocks of any metal are merely the tip of the iceberg, a visible fraction of a larger invisible inventory.
This is particularly true of nickel, though, because alone among the LME metals it is also produced in many forms, such as ferronickel, utility nickel or nickel pig iron, that are non-LME deliverable.
Such types of nickel trade at a discount to LME prices but those discounts are now widening as never before.
So too is the discount for stainless steel scrap, another important "hidden" source of nickel input for the stainless sector.
Stainless scrap is currently trading somewhere in a range of 75-80 percent of the LME nickel price depending on who you talk to. Most agree that the gap with the LME price is at or close to all-time record levels.
The availability of all this discounted material is displacing premium forms of nickel, which are now showing up in ever greater quantities in the LME system.
Why, after all, would anyone pay a premium when there is so much cheaper material around?
FINANCIERS TAKE THE SLACK
All of which poses the question of why the LME nickel price is not even lower than it already is.
Three-month metal is currently trading at the same sort of levels as seen in Q4 2012, when visible inventory on the LME was significantly lower.
The answer appears to be that increasing amounts of nickel are being bought by stocks financiers, whether to earn a small "cash-and-carry" return or as collateral against loans, particularly in China-oriented locations such as Johor.
That, together with the amount of metal in locations such as Vlissingen and Antwerp, stranded behind out-bound queues of other metals, raises the possibility of a counter-intuitive squeeze on availability should LME metal be needed, whether through unforeseen supply disruption or stainless sector restocking.
But any such squeeze is going to be short-lived and the impact more likely apparent in time-spreads and physical premiums than in outright price.
Nickel, in other words, is starting to show the same dynamics as other over-supplied metals such as aluminum and zinc.
Financiers can support the downside but anything other than the occasional short-covering flurry on the upside looks unlikely.
A slow continued grind around the top end of the global cost curve looks the most likely prognosis for the foreseeable future.
Also like aluminum.
(Andy Home is a Reuters columnist. The opinions expressed are his own)
(Editing by Anthony Barker)