Nickel: Deficits not enough to prevent slide in prices - TDS

Analysts at TDS, explain that Nickel prices rallied above the $12,000/t mark on Friday amid reports of widening deficits, news that production at Brazil’s Vale fell 4.3 percent year on year in the last quarter and dropping LME/Shanghai on warrant inventories, all of which led to a bout of short covering.

Key Quotes

“Short Nickel, Enter: $12,050/t, Stop: $12,800/t, Target: $10,250/t”

“Some players also went long on the belief that the coming steel cuts will boost margins and will increase smelter's ability to pay for feed. Nickel investors took a shine to the metal amid expectations NPI production cuts in China will tighten the market, after Golden Week and ahead into the 19th Congress.”

“In sharp contrast to the most recent rally, we see rising Indonesian NPI production, less Chinese steel smelting during the winter months and massive excess inventories along with still hefty spec long liquidations as being factors pulling nickel back down toward the mid-$10,000/t in the not too distant future.”

“Latest price action has added to the gains made through the earlier part of October, after hitting a low of 10,215/t and can be traced to short-covering. Chinese environmental planned capacity cuts for some 400kt of nickel pig iron ("NPI") capacity during the winter months have sparked a round of short-covering associated with the recent rally in prices. Market participants believed that, should the cuts result in a tighter NPI market, producers would substitute it for refined nickel, which would positively impact demand for refined nickel. Moreover, NPI production is increasing elsewhere, in particular in Indonesia, suggesting that Chinese stainless producers can import NPI if need be. Thereby, NPI cuts should have a limited impact on the market.”

“Further, as steel prices have rallied since the summer, strong margins have fueled a ramp-up in production ahead of the anticipated winter cuts, leading to a buildup in inventories. And considering the impending the arrival of stainless imports from a large producer in Indonesia, we expect a further buildup in stainless inventories. That being said, enduse demand is unlikely to keep up the pace. The slowdown in China Q3 GDP to 6.8% from 6.9% was largely due to lower property investment and construction, which does not bode well for white product demand. Continued deceleration of property prices in major cities should see the construction boom cool, and thus we expect less demand for white goods and other household appliances that include nickel content.”

“Although modest deficits are expected in nickel, global stocks remain at an extremely bloated 225 days of consumption, suggesting that the metal is far from scarce. And, as we previously noted, Indonesian producers continue to have ample room to grow their nickel ore exports. In fact, at refined prices above $11,000/t, production at mines and smelters in Indonesia is viable, suggesting that we will likely see an increase in Chinese imports originating from Indonesia as producers take advantage of their granted export permits. At the same time, we expect that permitted allowances may well grow in the near term.”

“Therefore, considering that we expect Indonesian ore to return to market, that both stainless steel and end-use demand is on the wane, the balance of risks remains to the downside and shorts could very well get back in at these prices.”