(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
Nickel is making a comeback.
London Metal Exchange (LME) three-month nickel hit a seven-year high of $20,225 per tonne on Thursday morning and has a new-found spring in its step after collapsing in February.
[Click here for an interactive chart of nickel prices]
That is when Chinese steel group Tsingshan announced its Indonesian nickel operations would supply matte – a form of the metal used only for stainless steel production – to battery makers. That undercut a collective bet that only refined nickel would be sufficiently high grade for the electric vehicle sector.
Bull spirits were rudely doused and nickel was the under-performer of the LME base metal pack until June, but has now clawed back all of its losses and a little bit more.
LME time-spreads have shifted to backwardation and registered inventory is flying out the warehouse door.
The metal is almost certainly heading to China, where a short squeeze is playing out on the Shanghai Futures Exchange (ShFE).
China is also looking physically short of nickel, with imports booming across the product spectrum. A market that has been obsessed by supply has been caught out by the strength of demand.
The ShFE nickel contract has outperformed London, leaping over its own February 2020 peak to register life-of-contract highs.
A short squeeze has been building for several months but it has recently become much more acute, with pronounced tightness on the September-December part of the forward curve.
The market tension reflects extremely low Shanghai stocks. Exchange inventory was just 4,455 tonnes at the end of August, the lowest level since the contract was launched in 2015. A slight rebuild to 5,950 tonnes this month still leaves stocks down by over 12,000 tonnes on the start of January.
Stocks liquidity isn’t helped by the Shanghai exchange’s limited number of deliverable brands. Other than China’s domestic producers, only Russia’s Norilsk Nickel and Glencore’s Norwegian Nikkelverk brands are deliverable against the contract.
Domestic supply of refined nickel cathode has been constrained this year, falling 16% in the first seven months relative to 2020, according to state research house Antaike.
It expects production to recover as dominant producer Jinchuan Group completes maintenance work. But Jilin Jien Nickel, a smaller operator with 8,000 tonnes of annual capacity, is switching from nickel cathode to nickel sulphate production, more profitable but not ShFE deliverable.
China’s imports of Russian nickel, meanwhile, have collapsed this year. The cumulative tally for the first seven months amounted to 14,300 tonnes, down from 30,600 tonnes in the same period of 2020.
That’s a stand-out in this year’s refined metal imports, which rose by 48% year-on-year to 109,000 tonnes between January and July.
Indeed, July’s imports of 22,500 tonnes were the strongest monthly volumes since August 2019. That’s the Shanghai squeeze opening the arbitrage import window.
Short-position holders on the Shanghai exchange will note with interest that imports of Norwegian metal jumped to 20,500 tonnes in January-July from just 5,000 tonnes in the year-ago period.
China’s gravitational pull on refined metal has led to a run on LME inventory, which has slid from an April peak of 264,606 tonnes to a current 181,368 tonnes. The amount of metal awaiting physical load-out accounts for 35% of the remaining tonnage.
This in turn has generated a short squeeze on the London market, the benchmark cash-to-three-months time-spread flexing out to a backwardation of $100 per tonne earlier this month, the tightest it’s been since 2019.
The cash premium has since eased to $10 per tonne, but sliding inventory promises more time-spread turbulence ahead.
The current rally and associated squeeze on refined metal is in part technical, particularly when it comes to the brand availability for delivery against Shanghai short positions.
But the roots lie in the sheer strength of Chinese nickel demand from a booming stainless steel sector, which registered year-on-year growth of 37% in the first quarter of 2021, according to the International Stainless Steel Forum.
There is no sign of any subsequent slow down. Indeed, Shanghai’s stainless steel contract, closely watched by Chinese nickel players, hit its own life-of-contract high last month against a backdrop of backwardation across the curve structure.
China’s imports of nickel feed for stainless production have been running at very strong levels this year.
Imports of ferronickel were up by 17% year-on-year in the first seven months of 2021. The category includes nickel pig iron from Indonesia, imports of which increased by 22%.
Imports of nickel ore, largely from the Philippines, rose by 25%, imports of matte by 73% and imports of intermediate products by 48%.
The fastest-growing imports, however, were those of nickel sulphate, which surged to 23,500 tonnes from just 2,700 tonnes in January-July 2020.
Nickel sulphate is used for battery manufacturing and if you were looking for evidence that electric vehicle battery demand is starting to gain physical traction in the nickel market, China’s mushrooming imports are a good starting point.
The combination of this new demand driver with strength in the stainless steel sector, the metal’s traditional price driver, is why nickel is back punching out fresh multi-year highs.
Nickel’s resurgence seems to have blind-sided investors, many of whom left the market after Tsingshan’s disruptive announcement about a potential new processing route for battery-grade nickel.
But then, as Goldman Sachs points out, “the nickel market has seen the most significant tightening increment relative to initial expectations across all the industrial metals.” (“Metals Watch”, Aug. 30 2021)
The investment bank projected a 48,000-tonne global supply surplus for 2021 at the start of the year. It now forecasts a 72,000-tonne deficit thanks mostly to expanded demand expectations.
There is still plenty of uncertainty surrounding the Indonesian part of the supply picture. The country is both ramping up production and, with Tsingshan leading, trying to pivot from nickel-stainless to nickel-battery processing.
The market, however, has become overly fixated on this alchemical Rubik’s Cube of Indonesian nickel supply and forgotten about demand, particularly that from the stainless steel sector.
The nickel price, currently trading at $20,100 per tonne is a timely reminder.
(Editing by Mark Potter)