Ni prices unlikely to rebound in near term

Hopes of a recovery in nickel prices at the start of 2024 have been dashed, as the markets continue to focus on an intensifying supply glut in the Class 1, Class 2 and nickel chemicals spaces. And even as market participants indicate that prices are now close to bottoming out with fundamentals accounted for, values are set for a prolonged spell at current levels.

Benchmark nickel on the London Metal Exchange (LME) has shed nearly 4pc this year to $16,140/t. The LME's annual index rebalance window, disruption to Chinese giant Tsingshan's Indonesian nickel supply, cuts to Australian output and delays to the launch of new capacity in Indonesia have all failed to lift prices, which continue to hover close to three-year lows. LME nickel recorded the biggest short position since 2003 in November, both in terms of percentage of open interest and lots, and a covering programme since then has stagnated with the short rebuilding at the Shanghai Futures Exchange, according to UK-based financial broker Marex.

Surpluses were already prominent on the Class 2 side, but Chinese producers' new-found capability to convert battery ingredient nickel sulphate into Class 1 metal has driven the new market oversupply. On-warrant nickel stocks in LME warehouses have been rising steadily and totalled 65,412t on 16 January, the highest since 24 November 2022, on the installed Chinese Class 1 capacity. As the market adjusts to the likelihood that the global transition to electric vehicles (EVs) will be slower than expected, China has redirected surplus nickel sulphate to domestic Class 1 production, creating more nickel units while reducing its own reliance on imports from traditional sources such as Russia. China imported 114,172t of nickel sulphate in January-November, more than double on the year, customs data show, with supplies from top producer Indonesia constituting 47pc of total imports. But China imported 83,114t of nickel metal over the same period, down by 41pc on the year.

On the Class 2 side, processing capability continues to support nickel pig iron (NPI) production in Indonesia despite a drop in prices, with participants adopting a strategy of producing NPI before deciding on whether or not to convert it into matte, based on market conditions. The Argus assessment for nickel pig iron min 10pc ex-works China has declined by 18.5pc to $13.037/kg since the fourth quarter of 2023.

"We expect the supply momentum to carry on into 2024, with rising output from Indonesia flooding the market," the head of base metals research at UK trading group Sucden Financial, Daria Efanova, said. "Indonesian mining output is set to grow to above 2.3mn t in 2024, with the trend continuing until 2026 when supply for the coming decade will peak."

Much of the bullishness around nickel prices during 2021-22 was based on a projected surge in global EV consumption. But while the market continues to be the single biggest driver of nickel demand growth, nickel use has been hit by reduced consumer spending in China, Europe and the US because of economic headwinds, policy changes in the west and the rise of more cost-effective EVs with no-nickel lithium iron phosphate batteries. Argus forecasts that global EV sales will rise by 37pc to 14.96mn in 2024, slower than the 64pc growth registered in 2021-22, as major automakers scale back production plans. The Argus assessment for nickel sulphate min 22pc cif China has fallen by a third over the past year to $3,150/t on 15 January.

"Automakers are unlikely to stockpile nickel as they have done in the past," Efanova said. "We expect that the EV trend is more likely to support prices rather than urge them higher this year."

With producers struggling for profits on the current trend of nickel prices, market participants are mostly of the view that there is neither a downside or upside to prices, given that the slower demand growth is weighing on prices just as the supply side moves to curtail output this year. Class 1 supply will stabilise this year with surplus Chinese capacity kept idle, Russia's Norilsk Nickel pivoting in part towards other nickel products, and Brazil's Vale still in asset integrity mode. And in the Class 2 market, construction of new capacities for nickel sulphate and upstream feedstock material mixed hydroxide precipitate will see delays and cancellations this year.

"There are possibilities of slower supply growth as prices are now close to the cost of production," Efanova said. "But while this might exacerbate the deficit by the end of the decade, this is unlikely to change the course of nickel prices in the near term."

With LME prices probably set for an extended spell in the early to mid-$16,000s/t, a key challenge for the market this year will be to balance near-term headwinds against the long-term picture of rising nickel demand so that the price encourages ramp-ups upstream and expansion in the value chain downstream.

By Raghav Jain