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LONDON (Reuters) - Another day, another landmark low for the nickel price.
London Metal Exchange (LME) three-month nickel traded down to $7,900 per ton on Monday morning. Forget the troughs of the Global Financial Crisis in 2008. Nickel is now trading at levels last seen in April 2003.
And there may be worse to come.
Might the price of nickel fall below that of copper, which is currently trading on the LME around $4,600 per ton? "Not an inconceivable prospect by any means," according to one analyst, Leon Westgate of ICBC Standard Bank. ("Commodities Weekly", Feb. 4, 2016).
Evidently, there are two sides to that particular equation, a relatively bullish view on copper and a dire view of nickel.
But Westgate is not alone in wondering just how bad things can get for the stainless steel alloying agent.
In a world of slowing metals demand, the markets are looking for a supply response and nickel producers have failed to deliver.
Only now are the first signs of producer capitulation starting to emerge, particularly in Australia, where Mincor and Panoramic Resources are putting mines onto care and maintenance and Queensland Nickel is teetering on the brink of insolvency.
But even if closures now start coming through, nickel has another problem in the form of the amount of inventory hanging over the market.
LME stocks are massive at 439,140 tonnes but they are not telling the whole story either because all the indications are that surplus is also piling up in China.
Superficially, LME stocks look to have topped out over the last couple of months after registering an all-time high of 465,564 tonnes in June 2015.
Canceled tonnage, denoting metal that has been earmarked for physical load-out, is relatively high at 36.1 percent of the total.
But there is more going on here than meets the eye.
The LME nickel contract allows for the delivery of metal in several different forms.
And it is one of these in particular, full plate cathode, that has been departing the system, even as other types of nickel have been flowing in.
The percentage of full plate cathode in the LME warehouse network has fallen fast over the last couple of months to around 50 percent from over 61 percent at the end of November.
Historically, full plate, produced mainly in Russia, used to account consistently for over 90 percent of LME stocks.
That's because it is widely viewed as "commodity grade" metal, shunned by many industrial users because of the need to cut it into more digestible size.
For the same reason full-plate cathode has tended to trade at significant discount to other forms of metal in the physical market-place.
But this is no longer the case.
The premium for full-plate nickel in Rotterdam rose to $40 per ton over LME cash last week, while that in South Korea was higher still at $60 per ton, according to LME broker Triland Metals.
The premium for briquettes, a more desirable and theoretically a more expensive option, is trading at $10 or under, it added.
This is an inversion of the physical market norm and signals unusual buying appetite for a form of nickel that has historically tended to languish in the LME market of last resort.
So what's going on?
Graphic on LME and SHFE nickel stocks:
This is all about financial rather than industrial demand and it is all about China.
Chinese refined nickel imports boomed in 2015. At 303,400 tonnes they were more than double the tally of the previous year and an all-time record high.
The biggest component of last year's import surge, at 194,100 tonnes came from Russia, where Norilsk Nickel is the world's largest producer of full-plate cathode.
The driver of this accelerated flow of Russian metal was the June decision by the Shanghai Futures Exchange (SHFE) to allow delivery of Norilsk brands against its new nickel contract.
Such was the contract's explosive start that there were real concerns of a major squeeze of short position holders due to a lack of deliverable material.
Russian full-plate cathode was deemed the solution and traders have since been scouring the LME system for such material with a view to delivering against the Shanghai market.
There are currently just over 60,000 tonnes of nickel in SHFE warehouses and the betting is that figure will rise ahead of another possible squeeze on the May contract.
Quite evidently, though, much more Russian metal has entered China than has yet shown up in SHFE warehouses.
The consensus view right now is that the balance is sitting in bonded warehouses in Shanghai, where it is both available for SHFE delivery and being used as collateral in the shadow lending market.
That is something of a surprise, given the clampdown on the metallic collateral trade by the Chinese authorities in the wake of the Qingdao port scandal, which was centered on allegations of multiple pledging of metal.
It seems, though, that while the collateral trade has been much reduced in metals such as copper, it is still flourishing for nickel, albeit with much tighter lending and storage controls.
But as Qingdao showed, what is sitting in bonded warehouses can just as easily head back into the international market as into the domestic Chinese market.
The nickel market was stunned by the wave of metal that flowed out of China after Qingdao in search of safe-haven storage. Exports in the months immediately after the Qingdao story hit the headlines in May 2014 surged to almost 100,000 tonnes, inverting China's normal status as net importer.
Bonded warehouse stocks are ghost stocks in terms of not showing up statistically but that doesn't mean they can't take concrete, visible form if the collateral chain is rattled.
Moreover, it is telling that LME stocks have declined only marginally despite the massive tonnages that have been flowing into China.
Without the Chinese attractor, they would be much, much higher still.
And this is why nickel's prospects look so bearish even by the standards of a bleak base metals picture.
With producers facing off in a game of last-man-standing, surplus metal is still accumulating, meaning that even if supply starts contracting, the impact will be deadened by stocks overhang.
It's just that the overhang is no longer building in the LME system. It's building in China.
(The opinions expressed here are those of the author, a columnist for Reuters)
Editing by David Evans