(The opinions expressed here are those of the author, a columnist for Reuters.)
* Shanghai nickel price, volume and open interest: tmsnrt.rs/31zmWLb
* LME price stocks and spreads: tmsnrt.rs/31DqI6c
By Andy Home
LONDON, Sept 19 (Reuters) - There’s only so much bullish news even the red-hot nickel market can absorb.
London nickel leapt to a five-year high of $18,850 per tonne this month as Indonesia confirmed it would bring forward to next year a ban on exporting nickel ore.
That will cut off the major source of feed for China’s nickel pig iron (NPI) producers.
This week’s news that the Philippines will suspend indefinitely operations in the nickel mining hub of Tawi-Tawi province threatens supply from China’s second largest ore supplier.
But rather than extending its super-charged rally, nickel has retreated from the highs in both London and Shanghai, a telling sign of bull exhaustion.
This particular chapter in the nickel story, nevertheless, is far from over, the original Shanghai surge morphing into a London squeeze.
Shanghai has led London on the move higher, particularly during the ferocious rallies of Aug. 8 and 30, when much of the price action played out in the early hours of the London morning.
The Shanghai Futures Exchange (ShFE) nickel contract saw both volumes and market open interest soar on the moves higher as speculators stampeded into the market.
That surge seems to be abating. Volumes remain elevated but market open interest has collapsed by almost 30% since the start of September, implying a wave of profit-taking.
London too seems to have run out of upside momentum, with nickel sliding to $17,300.
Speculative long positioning on the LME nickel contract peaked last week at about 46% of open interest, the largest collective bull bet since September 2017, according to LME broker Marex Spectron. This had eased to 39% on Tuesday.
The fact that the price has fallen despite the latest threat to the supply chain suggests a market that had moved too aggressively ahead of fundamentals.
The nickel action is far from finished in London, however.
Focus has shifted from the outright price to time-spreads as the front part of the LME curve experiences its most acute tightness in a decade.
The benchmark cash-to-three-months time-spread CMNI0-3 flexed out to a backwardation of $163 per tonne last week.
At Wednesday’s close cash metal was still commanding a significant $105 premium over the three-month price.
Such severe tightness is “something of an oddity”, according to analysts at Citi (“Metals Weekly”, Sept. 3, 2019).
The Indonesian ore ban doesn’t start until January, which allows exporters to maximise shipments over the remainder of the year.
Moreover, China’s NPI producers are holding “ample stocks” of ore, providing some cushion against the supply-chain disruption expected next year.
Supply “deficits in our numbers don’t get massive until after 2021,” according to Citi, which says the current squeeze is down to “the massive technical and trend buying congregating in the nearby monthly contracts” and distorting the curve.
The bank also says the spreads blow-out could spur a reversal in the LME stocks downtrend as shorts are incentivised to deliver metal to the exchange.
Such deliveries are already taking place. After falling steadily over the last two years, LME inventory has staged a minor rebuild.
A total 41,910 tonnes have entered the LME warehouse system since the beginning of August, when the front month of the LME curve first started tightening.
Prior to August the cumulative inflow in the first seven months of the year was just 46,800 tonnes.
Some of the impact has been mitigated by an acceleration in cancellations with the amount of metal earmarked for physical load-out surging by a net 22,500 tonnes last week and the ratio of cancelled tonnage jumping to 44%.
This is a key reason why the spreads remain as tight as they are with the market structure still incentivising more metal into the system.
It will be an interesting test of physical market availability since there is an analysts’ consensus that part of the previous strong drawdown in LME stocks was down to off-market stockbuilding.
It’s clear that some of this shadow stock has already re-appeared. The only question is how much more is “out there”. Citi’s tentative answer is around 350,000 tonnes, which together with visible exchange stocks, means around 600,000 tonnes of total stocks, equivalent to 12 weeks’ global usage.
Stocks form one part of the multi-dimensional puzzle as to how the global supply chain will deal with the loss of Indonesian ore.
The Philippines is part of the answer but the country’s nickel production is itself a moving target given the rolling suspensions of local miners for environmental checks.
So too is supply from alternative sources such as Papua New Guinea, where the Ramu mine is facing its own environmental pressures.
However, the newsflow is not uniformly bullish.
Brazil’s Vale, for example, has just received permission to reactivate its 25,000-tonne per year Onca Puma ferronickel operations.
Then there is the problem of demand.
Nickel’s future demand boost from electric vehicles may have lit the bull fires in the market but for now nickel’s fortunes are still beholden to the stainless steel sector.
So far this year a super-strong Chinese market has offset stainless steel weakness just about everywhere else.
But analysts at Argonaut point out that China’s stainless inventory has been rapidly building which is “not a positive development for the nickel price outlook”. (“Nickel: More Price Consolidation Ahead”, Sept. 19. 2019)
The combination of resilient Chinese demand for stainless steel, the accumulation of supply threats and a speculative surge has helped nickel escape the broader macroeconomic gloom and comfortably outperform every other LME-traded base metal so far this year.
A reality check may be overdue, particularly if Chinese stainless production weakens in the weeks ahead and more metal is drawn into the exchange light by the current LME backwardation.
Make no mistake, the Indonesian ore ban has upended the supply landscape with just about every analyst revising upwards their price forecasts over the coming years.
But no market moves in a straight line. Not even nickel.
Editing by Edmund Blair