The nickel market enjoyed a bull run in the first quarter of this year following the Indonesian government’s hefty export tax on nickel ore exports resulting in a defacto ban. Overnight almost a third of global supply disappeared from the market and although Chinese Nickel Pig Iron (NPI) producers had been stockpiling supplies, nickel price rose as investors assumed the market would move rapidly into deficit.

 

To their consternation, and to most observers’ surprise, it has not. Indeed, China appears to be accessing adequate supplies from other sources to supplement its stocks of high-grade Indonesian material. While concentrate supplies from Brazil, Zimbabwe and Vietnam are said to have increased, it is the Philippines that has stepped in as the benefactor of Indonesia’s absence with shipments of their lower-grade material surging this year.

 

Meanwhile, imports of ferronickel are reported to also be booming, near doubling to 159,000 metric tons in the first seven months of this year and scrap prices are up. According to Citi estimates, quoted by Reuters, nickel scrap discounts (to LME Nickel) are currently trading at 83-86% and as high as 90% in Asia, up from 70-75% at the start of this year. So, clearly the market is sucking in concentrate and nickel units in other forms such as scrap and ferro-nickel, yet, paradoxically, at the very same time LME nickel inventory is hitting record highs.

 

At 324,714 tons, LME nickel inventory has risen by more than 63,000 tons, or 24%, since the start of the year. Bizarrely, a large part of this supply could be coming from China, itself. Both official and bonded nickel stocks are said to be flowing out the country with refined nickel exports up 112% at 63,000 tons in the first seven months of this year.

 

Some 21,000 tons of this metal has gone to Malaysia and South Korea, both LME warehousing locations. Reuters speculates the actual volume may be higher as the official export figures do not report bonded stocks on which import duties were never paid in the first place. Whether such metal has been pulled out of China by a positive LME arbitrage or pushed out by the post-Qingdao clampdown on collateral financing, is a point the article cannot judge but the result is clear: refined metal out, unrefined metal in, so much so that China has become a net exporter of refined nickel.

 

Citi is quoted as saying, however, that the time is fast approaching when raw materials pressures translate into NPI capacity closures. After holding steady at around 225,000 tons in the first half of this year, it forecasts China’s NPI output to contract by 38% year-on-year in the second half as the stockpiled Indonesian supplies run out. The latest Reuters poll of analysts agrees saying only two out of 12 offering a market balance view for next year. The rest expect a nickel market supply deficit.

 

Maybe we should not be surprised, therefore, to see the options market showing a dramatic rise in December open market interest as investors and consumers position themselves for an anticipated rise in refined metal prices later in the year. Consumers believing the worst is behind them as regards the Indonesian export changes will have on the nickel price should review the data. It is entirely possible prices could pick later this year or early next.