China demand and tight supplies set to sustain nickel price rally

LONDON – A combination of surging China imports, tighter supplies and fund interest are expected to sustain prices of stainless steel ingredient nickel, which have reached their highest level in more than two years.

Benchmark nickel on the London Metal Exchange hit $14 040/t on Monday, the highest since May 2015 and a gain of more than 55% since June.

"The fundamental story for nickel has started off well and it is looking good for at least the next couple of years," said Wood Mackenzie analyst Adrian Gardner.

Wood Mackenzie forecasts a deficit of between 80 000 t to 90 000 t this year following a deficit of similar levels in 2017.

The shortfall is likely to be particularly acute in China, which accounts for about half of global consumption estimated at around 2.1-million tonnes this year but where an environmental crackdown has shut capacity.

It is expected to ramp up imports. Latest data shows China's nickel imports more than doubled in December from a year earlier to 41 315 t.

"There is still a decent amount of upside for prices from here," said ETF Securities commodities strategist Nitesh Shah, citing declining stocks and higher demand in China.

Fuelling the rally over the past couple of days was First Quantum Minerals, which said its nickel output dropped 24% last year to 17 837 t due to its Ravensthorpe mine, in Australia, being shut since September.

Traders said the possibility of a force majeure at the Ambatovy nickel and cobalt mine, in Madagascar, where operations were halted due to a cyclone on January 4, was making the market jittery about supplies.

Also helping nickel is the US currency's slide to three-year lows, making dollar-denominated commodities cheaper for holders of other currencies; a relationship used by funds that trade using buy and sell signals from numerical models.

The rally accelerated after nickel prices broke through a key technical level around $13 000 last week and funds bought the LME contract.

LME data shows funds' net long nickel positions at 47 708 lots or 286 248 t on January 26, the highest since a year ago and well above the 13 000 lots recorded in early December.

One threat to the rally is the likelihood of higher production from Indonesia and the Philippines this year after a move by the top producers to pull back on restrictions targeting their mining sectors.

Still, also supporting nickel is buying by some funds on the expectation of rising demand for the batteries used to power electric vehicles.

Wood Mackenzie forecasts nickel usage in EV batteries at between 60 000 t to 80 000 t this year and 220 000 t in 2025.

However, stocks of nickel briquette – easily crushed into small particles and dissolved in sulphuric acid to make nickel sulphate used in lithium-ion rechargeable batteries – in LME warehouses are still elevated.

They stand at 286 800 t, up from 233 934 t a year ago, or about 80% of total stocks.

Headline stocks in LME-approved warehouses are down 7% from a 2017 high to around 360 700 t, the lowest level since October 2016.

"Nickel inventories are high, but note recent declines have pushed prices up nonetheless - the direction of stocks matters, not the level," Bank of America Merrill Lynch said in a note