LONDON, June 28 (Reuters) - Two years ago the chances of a nickel price recovery seemed remote, but that mindset has changed as shrinking stocks and falling supplies have created a bullish backdrop for the stainless steel ingredient.
Benchmark nickel on the London Metal Exchange recently hit $16,690 a tonne, the highest since December 2014, after falling to 13-year lows below $8,000 a tonne in February 2016.
A retreat to around $15,000 a tonne was triggered by fears of a trade war between the United States and China, the world’s two largest economies. However, prices are still up about 70 percent since June 2017 when expectations of deficits began.
Higher prices have not, as some expected, led to rising output and deficits are likely to be a feature for some years.
“There is not enough supply, which means stocks have to be drawn,” said Jim Lennon, Managing Director at Red Door Research. “The environmental clampdown in China has taken out about 35,000 tonnes of nickel pig iron capacity since May.”
That is nearly two percent of global nickel demand estimated this year at around two million tonnes and one reason why top consumer China has been importing.
China’s stringent targets for improving air quality has seen a nationwide crackdown on polluting industries such as mining, smelting and manufacturing.
Nickel pig iron is a cheaper alternative to pure nickel for use in stainless steel, a sector which consumes around two-thirds of global supplies of the metal valued for its anti-corrosive properties.
Stocks of nickel in LME approved warehouses have dropped 40 percent to near 270,000 tonnes since January 2016. In warehouses monitored by the Shanghai Futures Exchange, stocks have tumbled nearly 80 percent to below 24,000 tonnes since August 2016.
Wood Mackenzie analyst Andrew Mitchell said new capacity can take years. “Say someone commits to a 30,000-tonne project today, that would be a two-year build and a four to five-year ramp up to capacity.”
The consultancy estimates the nickel market saw a deficit of 60,000 tonnes last year and forecasts a shortage of 70,000 and 90,000 tonnes this year and next respectively.
Nickel demand is healthy, analysts say, even though some indicators suggest an economic slowdown in China and high stainless steel inventories. But the landscape has changed.
The spotlight has fallen on Chinese-owned stainless giant Tsingshan which started production last August at a plant in Indonesia that should by the end of 2018 have annual capacity of 3 million tonnes.
“Most of that stainless will be 300 series, which typically uses 8.0-8.5 percent nickel,” Mitchell said.
That compares with 200 series stainless steel with only 1-2.5 percent nickel and 400 series which contains no nickel.
Some producers are also touting the fast-growing electric vehicle sector as the origin of new demand.
But analysts say the growing use of nickel in the rechargeable batteries that power electric vehicles is unlikely to displace stainless as the dominant consumer.
Last year batteries accounted about 3 percent of nickel demand and by 2020 the forecast is for a number near 6 percent.
“By 2025, about 250,000 tonnes of nickel will be used in batteries or about 9.5 percent of total demand at 2.6 million tonnes,” Mitchell said.
Reporting by Pratima Desai; additional reporting by Yilei Sun; editing by David Evans
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