The benchmark nickel price on the London Metal Exchange (LME) has rallied over the past month after briefly falling below $16,000/t, as trading firms increased their buying to cover vast short positions. Options buying activity and commodity trading advisor bids have lifted the contract above $18,000/t in recent days.
Higher Chinese nickel sulphate prices, delays to the issue of ore production licences in Indonesia and cuts to class 2 nickel supply also supported the price rise.
But the physical market outlook is mixed, despite the recent rise in prices. A sizable surplus of class 1 nickel and weak downstream consumption are applying pressure on the downside, but possible further supply cuts in Indonesia, Australia and New Caledonia are shoring up prices. A price gap between LME and Shanghai Futures Exchange (SHFE) contracts is providing arbitrage opportunities and keeping LME values in check.
Covering short positions
The LME official three-month nickel price rose by 13.5pc from $15,987.50/t on 9 February to $18,445/t on 13 March. Sustained buying to cover short positions was a major driver of the increase. Nickel short positions on the LME fell from 61,000 lots on 9 February to 22,000 lots on 11 March, according to financial broker Marex strategist Al Munro. The cyclical nature of nickel trade has also prompted options positioning around the current prices as trading companies guard against volatility.
Nickel prices hit a trough in February, a trading firm said. "The class 2 market is tighter than expected now, so we should not go back to the $16,000/t level."
Class 1 oversupplied, class 2 tight
Fundamentals for physical nickel indicate there is a surplus for class 1 nickel, driven by increasing LME-deliverable capacity in China and declining use of class 1 products in the battery market. On-warrant class 1 stocks in LME warehouses touched 70,000t on 4 March, for the first time since November 2021.
In contrast, availability of class 2 nickel has tightened, with nearly 200,000t of capacity in the form of ferro-nickel and nickel pig iron (NPI) cut from the supply mix in recent months, according to Australian bank Macquarie.
The supply squeeze is most pronounced in ferro-nickel. The low-grade product held a narrow price gap with NPI last year, but is now being offered at just $1,000/t below class 1 LME prices, according to Macquarie. Surplus Asian NPI stocks are flowing into Europe to replace scarce ferro-nickel supplies, Macquarie said.
Unreliable and under-reported data from China and Indonesia have made it difficult for market participants to assess nickel balances against price movements, particularly in class 2 products. Analysts in January predicted an overall nickel surplus of more than 100,000t for 2024, but have now cut their overhang forecasts by more than half, with a possible total rebalancing in 2025.
Battery demand jumps, stainless stable
Nickel demand growth was almost exclusively delivered by Chinese stainless steel production last year, with Macquarie pegging China's nickel use in the stainless steel sector to have risen by 20pc year on year. Chinese demand growth is expected to stabilise in 2024, as indicated by a fall in stainless futures prices on the SHFE. Macquarie expects global stainless steel production to rise by 5.5pc this year to 62.2mn t, a rate comparable with 2023.
The main source of nickel demand this year will come from restocking among battery cathode producers, reflected in rising Chinese nickel sulphate prices. The Argus assessment for nickel sulphate min 22pc ex-works China has increased by 17.5pc from the start of this year to an average of 29,650 yuan/t ($4,100/t) on 14 March. Nickel demand for electric vehicle (EV) production will rise by a third on the year to 450,000t in 2024, Argus Consulting data show.
Indonesia ore dynamics
Bureaucratic delays in granting nickel ore production licences in Indonesian have lifted ore prices, limiting the supply of downstream nickel intermediate products mixed hydroxide precipitate and matte. Indonesia's government is likely to implement stricter controls this year to guard against environmental, social and governance concerns, alleged corruption and illegal exports. This could support ore prices and drive NPI and LME nickel prices higher. But Indonesia's fundamental policy of flooding the global market with nickel units will continue.
Push-pull effect
Prices are expected to recouple with fundamentals once the current short covering programme eases. The expected nickel surplus should suppress prices below $20,000/t, market participants said. And further cuts to ex-Indonesia supply could drive the market towards $19,000/t, with trading firms focused on Australian mining group BHP's review of its Nickel West operations.
"We are in a place where everything could change in a matter of 24 hours," a trading firm said. "If Nickel West announce cuts, you will see the market reacting immediately."
