Nickel bulls’ focus on LME stocks a risky strategy

Nickel has joined in the cross-metals rally last week on the London Metal Exchange but it is still the second-worst performer so far this year next to tin. By Andy Home /LondonFor the nickel market, it’s a case of once bitten, twice shy. Analysts are finding ever more evidence that the Indonesian ban on nickel ore exports introduced at the start of 2014 is finally starting to impact China’s massive nickel pig iron (NPI) sector. Chinese stocks of nickel ore are falling. So too, everyone agrees, is actual NPI production, although the scale and pace of decline is difficult to pinpoint in what is a notoriously opaque part of the nickel supply chain. China’s imports of nickel are trending higher, particularly those of ferronickel, the most obvious substitute for NPI. Yet the market remains decidedly unenthused by these developments. On the London Metal Exchange (LME) nickel has joined in the cross-metals rally last week but it is still the second-worst performer so far this year next to tin. Currently trading around $14,000 per tonne, three-month metal is pretty much where it was when the ban was first introduced. LME positioning data shows money managers holding a marginal net long. The alternative data series compiled by Marex Spectron shows investors positioned net short. The problem is that having been burned so badly last year, when nickel rocketed up to above $21,600 per tonne only to collapse again, few are prepared yet to recommit to the bull story. And they are unlikely to do so until they see tangible evidence of shortfall in the form of falling LME stocks. It was the inexorable rise in LME stocks last year that dashed bullish exuberance in this market. And, it seems, it will take a major trend reversal in LME stocks to reignite nickel’s fires. But LME stocks are a problematic pricing signal for any base metal and nickel is no exception. Right now, LME stocks are still rising, although there are tentative signs that the uptrend is losing momentum. And that seems to be about right in terms of this market’s underlying supply-demand dynamics. The International Nickel Study Group’s latest monthly bulletin showed the global refined market in 25,000-tonne surplus in the first two months of this year. That may seem surprising if the consensus about falling Chinese NPI is right. But it’s worth remembering that production outside of China is still growing thanks to a handful of mega projects that were initiated when the commodity super-cycle was still in full swing but are only now ramping up. True, several have experienced delays and technical problems, particularly those using the relatively new high-pressure-acid-leach (HPAL) technology. First Quantum, which appeared to have mastered HPAL at its Ravensthorpe plant in Australia, experienced an acid spill last December and saw first-quarter output dip sharply to 4,200 tonnes from over 7,500 tonnes in the previous three quarters. Glencore’s Koniambo ferronickel plant in New Caledonia also suffered a leak in December with output sliding to just 2,200 tonnes in the first three months of this year from 4,000 tonnes in the prior quarter. Sherritt’s Ambatovy operations in Madagascar, another HPAL user, were hit by a two-week technical outage and strike action in the first quarter. But Ambatovy still managed to lift output to 11,640 tonnes, the highest level since production began at the end of 2012. And that’s as good an example as any of the bigger picture with these projects, one of slow and often problem-plagued commissioning but with output gradually increasing. Take Goro, for example. Now renamed Vale New Caledonia (VNC), Goro was the problem poster-child for HPAL’s many technical challenges. But Vale has just reported record quarterly production at VNC, although at 6,500 tonnes of finished product, the plant is still a long way from nominal capacity of 58,000 tonnes per year. It and most of the other new mega projects are still ramping up, albeit in a two-steps-forward-one-step-back sort of way. As they do so, they are driving non-Chinese production ever upwards, which is one of the reasons for continued supply surplus. The other is the poor health of the stainless steel sector, which is the largest single end-user of nickel in all its forms. The International Stainless Steel Forum has just released its 2014 global production estimate, showing growth of 8.3% to yet another new record of 41.7mn tonnes. But the headline annual figures mask a marked slowdown in the fourth quarter of last year. The normal seasonal rebound from the summer doldrums of the third quarter was highly anaemic at just 0.8%. With the twin exceptions of China and to a much lesser extent the Americas, global fourth-quarter production actually fell quarter-on-quarter. And anecdotal evidence suggests there was little pick-up in the first quarter of this year either. Indeed, China’s stainless mills, accounting for over 50% of global production, are facing the same problems as the rest of the country’s steel sector, namely slowing domestic demand and increase trade sanctions against exports. * Andy Home is a columnist for Reuters. The opinions expressed are his own.