After 2 months holding steady at 59, our Stainless MMI sank in December to 54, down 8.5% from last month.

Three-month nickel on the London Metal Exchange fell in November to a new 12-year low, falling as low as $8,145 per metric ton. The metal is the biggest loser on the LME this year, losing around 45% of its value on the year to date.

Stainless_Chart_December-2015_FNL

This brings up the question: is there still downside potential?

Just a year ago, when nickel was trading near $15,000/mt, most analysts only saw upside risk and little downside potential. Since prices were trading at a 50% discount from nickel’s peak in 2011, and half the producers were already underwater, how much lower could prices go?

They Can Go Lower

Well, so far, from $15,000 to $8,500 is a 44% decline, and there you have your “downside potential.” Why do people make the mistake of buying low only to see prices go even lower? Behavioral finance calls this “anchoring,” the human tendency to attach or “anchor” our thoughts to a reference point even when it makes no logical sense.

When buyers see that nickel prices have fallen significantly and quickly, they anchor the new low price onto a recent price high that nickel previously achieved. This creates the idea that the new price provides an opportunity to buy nickel at a discount.

Most of the time, how high the metal was trading before is irrelevant and we can’t just say that something is undervalued when there has been a change in the metal’s underlying fundamentals. The poor outlook for struggling steel and stainless sectors, as well as China’s slowing growth, kept a lid on a nickel price increase this year. Finally, a surging dollar in November triggered a new sell-off, driving the metal to record lows.

Low prices keep putting more and more pressure on smelters. Toward the end of the month, nickel smelters in China announced plans to cut output next year by at least 20%. The smelters didn’t state how much nickel that 20% actually represents, but analysts estimate it to be near 120,000 metric tons. Eight producers already agreed to cut output in December by 15,000 mt. It’s estimated that 70% of global production is now loss-making production.

Will the new production cuts lead to sustainable higher prices? We’ll have to wait and see how the market reacts. So far, price rallies have been short-lived and given the poor commodity macro outlook, we can’t mark a limit to the downside.

Price Trends

The Allegheny Ludlum 316 stainless surcharge fell 8% to $0.47 per pound. The price of Chinese primary nickel fell 11% over the month to $10,848 per metric ton. The three-month nickel price finished the month on the LME finished flat at $8,800 per metric ton, down 13% from last month. Chinese 304 stainless steel scrap closed the month at $1,070.73 per metric ton, a 10% decline.

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