This week, prices fell below the $10,000 per metric ton, a physiological resistance level. Prices are now approaching the record low of 2009 when prices hit $8,850/mt. If so, nickel would be the first industrial metal to fall below recession levels.
3-month LME Nickel below $10,000 and approaching record lows. Graph: MetalMiner.
The slump in prices made some producers cut output and we’ve heard people talking about a price spike as producers are underwater. But as you are aware, production costs do not determine prices, investors do.
The bearish momentum in China’s stock market and the commodities markets will keep a lid on nickel prices and, in our view, prices could keep sliding. Why not? They’re already nearing the lows of 2009.
Get your short- and medium-term buying strategy for nickel
On August 12, for the second straight day, China devalued its currency, sending nickel and other base metals in a free-fall. Then, the central bank pushed the value of the currency lower a third time yesterday.
China’s economy is at a standstill and investors are concerned that it could fall further as commodity prices, including nickel, are now in reverse and traders view the devaluation of the yuan as a sign a currency war could follow, further putting the global economy in turmoil.
However, the central bank stated that financial markets should not be affected in the long-term as it doesn’t anticipate a consistent depreciation of the yuan.
“Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan,” the central bank stated.
Not everyone is so optimistic, however, as Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, told The Guardian: “While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world.”
Nickel Prices Primed for a Turnaround?
Our own Stuart Burns wrote just the other day that rising nickel inventories in London Metal Exchange warehouses could signal a bearish turn for the future of refined nickel prices.
This is contrary to the established viewpoint that the Indonesian export ban will lead to a shortage of nickel ore for Chinese production and, in turn, lead to rising prices. Burns concluded that as it is, there does not appear to be a case for nickel prices to rise in the near future.
So What Should My Industrial Buying Strategy Be?
You can find a more in-depth nickel price forecast in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:
Rising London Metal Exchange nickel inventories have been taken as a bearish sign for the future path of refined nickel prices, while appearing to run counter to the long running narrative that says the Indonesian export ban introduced in early 2014 will eventually lead to a shortage of nickel ore for Chinese nickel-pig iron production and, hence, upward pressure on prices.
From a fundamentals point of view, nickel has been giving confusing messages of late and views vary widely on future price direction.
HSBC: The Biggest Nickel Bull
HSBC, for example, in its most recent Metals & Mining Quarterly Review forecast just last month said there would be a 53,000-metric ton deficit in the nickel market this year and prices would average $15,120 per mt this year. They are currently at $10,800 at the time of this writing. As a consequence of HSBC’s constrained supply side view, they are predicting $21,500 per mt in 2016 and $22,000 per ton in 2017.
A large part of the bank’s argument seems to be based on its belief that global stainless steel output will grow at a CAGR of 3.8% during 2014-18, admittedly considerably lower than the 6.5% CAGR during 2010-14, but still a hefty bet on China where concerns are growing about how robustly stainless output can continue to rise. Read more
The EU will charge tariffs of between 24.3% and 25.3% for sheet, coil and strip imports from China and of 6.8% for Taiwanese product, following a complaint lodged in May 2014 by the European steel producers association Eurofer.
Mincor Will Cut Production
Australian nickel miner Mincor Resourcessaid on Wednesday it will reduce production by up to 56% over the six months ending in December due to persistent low nickel prices that have left operating levels unsustainable.
Russia pumped oil and gas, nickel, aluminum and other commodities at the expense of building its manufacturing base. With few exceptions, manufacturing suffered at the alter of a strong ruble and, for a time, was flattered by a strong domestic economy playing catch up after years of Soviet waste. The following graph of real effective exchange rate against exports of non-oil goods shows how the strength of currency correlates with falling exports of manufactured goods.
Source: London Telegraph
But now, a combination of falling commodity prices, particularly oil and gas, and western sanctions following Russia’s misadventure in Ukraine in 2014, have left the economy in a state of decline. According to the London Telegraph Russia is running a budget deficit of 3.7% which may not sound like much, but for an economy without developed capital markets it shouldn’t be running a deficit at all according to sources quoted by the paper. Read more
Want a short-term buying strategy for nickel? Check out our complimentary July Metal Buying Outlook report!
1. Dollar to Euro exchange rate
2. Stainless steel global production
3. Global capacity utilization
4. China coking coal prices (impacting Chinese nickel pig iron production)
5. China GDP & PMI data
Nickel fundamentals do not tell a very good story if you are a stainless producer or service center. However, buying organizations likely feel differently about bearish metals. Nickel faces a number of headwinds that will continue to put pressure on prices.
Specifically, nickel suffers from weak global demand, excess service center inventory levels, an Indonesian export ban that failed to do what it intended to do (we’ll come to that in a moment) and increased stockpiles in China (although we do not accept the one-to-one correlation that higher inventory levels necessarily equate to lower prices and vice versa, lower inventory levels don’t necessarily equate to higher prices).
Service centers tell MetalMiner that inventory levels remain well above historical “healthy” MOH averages (about 2.4-2.6). Instead, inventory levels are up over 3.5 months, seasonally adjusted. This is a very bearish indicator. Demand has slowed for the typical summer slow-down. Service centers report transactional business is slow.
The Indonesian Export Ban
As many are aware the Indonesian government banned the export of unprocessed minerals back in January of 2014. Instead of having the desired effect of generating new investment for higher value added processing in country, exports have dried up and the government has begun tinkering with the ban to allow for some copper exports. The ban on nickel and aluminum exports remains intact but news reports suggest the ban for bauxite might be lifted which may be an indicator that the government could change its policy.
Regardless, this too is a bearish factor weighing on nickel.
Three-month nickel closed the month of June at $12,000/mt, sliding to a 6-year low. Nickel is in free-fall as shortage expectations faded. The long-term outlook remains bearish, especially while the rest of base metals keep falling. We expect to see high price volatility in the coming months.
So What Should My Industrial Buying Strategy Be?
This nickel price forecast was excerpted from our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds, consult the July 2015 report!
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The London Metal Exchange’s Index of six industrial metals is heading for a fourth-straight quarterly loss, the longest such streak since 2001. Greece’s standoff with its creditors is adding to economic concerns amid a slowdown in China.
Nickel for three-month delivery retreated 4.9% to settle at $11,835 a metric ton at 5:51 p.m. on the LME, the biggest drop since Sept. 9. The price touched $11,730, the lowest since May 2009. The metal has lost 22% of its value this year.
Daily LME data showed nickel stocks rose 870 mt to 459,018 mt, halting a falling trend seen since the start of June and again sowing doubts that the market is poised to tighten significantly.
The Shanghai Futures Exchange (ShFE) approved three new nickel brands – including OAO Norilsk Nickel – today for delivery against its contracts as persistently high stockpiles and risk aversion over Greece weighed on the market.
Architecture billings increased in May, while Morgan Stanley changed its forecast for nickel prices to a more bearish outlook.
ABI Back in Positive Territory
Led by growing demand for new schools, hospitals, cultural facilities and municipal buildings, the Architecture Billings Index (ABI) increased in May following its second monthly drop this year. As an economic indicator of construction activity, the ABI reflects an approximate nine to 12 month lead time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 51.9, up from a mark of 48.8 in April. This score reflects an increase in design services (any score above 50 indicates an increase in billings).
“As has been the case for the past several years, while the design and construction industry has been in a recovery phase, we continue to receive mixed signals on business conditions in the marketplace,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Generally, the business climate is favorable, but there are still construction sectors and regions of the country that are struggling, producing the occasional backslide in the midst of what seems to be growing momentum for the entire industry.”
Morgan Stanley Bearish on Nickel
Morgan Stanley slashed its nickel price forecasts for the second half of the year Tuesday as demand from stainless steel producers continues to be undermined by a deteriorating outlook for global growth. The bank cut its third quarter 2015 nickel price forecast by 12% to $13,228 a metric ton; and its fourth quarter outlook by 10% to $13,448 a metric ton.