Nickel prices on the London Metal Exchange (LME) have been in steady decline since the start of February, driven mainly by a combination of subdued domestic demand in China and the prospect of further monetary policy tightening in the US.
Prices rose sharply during January on expectations of a strong Chinese recovery as the country abruptly ended its zero-Covid policy, but they have since fallen back on the belief that the scale of market optimism around the world's top consumer was misplaced. Downward pressure has also come from a hawkish outlook put forward by the US Federal Reserve after latest data showed inflation was running hotter than expected in the country, together with the strength of the US dollar.
Since 1 February, when benchmark LME nickel settled at $30,325/t, the contract has shed 22.5pc to settle at $23,475/t on 9 March. The declines have come despite nickel inventories in LME warehouses falling by 20.5pc since the start of this year, amounting to 40,008t as of 9 March, with analysts agreeing that further falls are likely in the near term.
"We do not expect to see a strong recovery in prices until the Chinese recovery is proven to be sustainable," trading group Sucden Financial research associate Daria Efanova said. "Even with higher PMI and improved home sales in China, sentiment struggled to pick up."
The market was further disappointed this week as China's National People's Congress confirmed a relatively cautious economic growth target of 5pc at its annual parliamentary session on 5 March, and a lack of major stimulus measures to boost real estate and infrastructure dented sentiment around the country's nickel consumption in the construction sector.
Analysts agree that nickel's price direction for the rest of the first quarter will continue to track the economic and monetary policy environment, and in particular, US dollar moves, after which hard data for China's economic performance will take over.
Alongside prevailing macros, the recent fall in nickel prices can be traced from the standpoint of market fundamentals. Following improved demand in January, growth in the European stainless steel market has been choppy on lower-than-expected buyer uptake, together with high downstream inventory levels. Destocking in Europe, thought to be winding down in the first quarter, is now said to be extended through to later this year amid weakness in the construction and consumer goods sectors. Stainless steel scrap suppliers in Europe have mostly spoken of softening domestic demand, with the exception of 316-grade scrap, supply of which continues to be acutely tight. And in China, increased nickel pig iron (NPI) imports from Indonesia, together with higher domestic output, have outpaced steelmaker demand recently, weighing on prices.
Electric vehicle (EV) sales have also largely disappointed this year, with producers having cut prices since January in a bid to boost demand growth ahead of a possible recession and slowing EV uptake. NCM and NCA cathode prices have steadily declined on a weekly basis since the start of this year, also reflecting a corresponding drop in cobalt and lithium prices.
On the supply side, new projects in the Class 2 space continue to gain traction, with analysts widely holding the view that the planned ramp-up in Indonesian mine output this year is playing a role in finally pressuring benchmark prices lower. According to the International Nickel Study Group (INSG), the nickel market was in a supply surplus of 112,000t last year, with this structure surplus expected to widen in 2023 on the back of surging NPI and intermediates supply. Indonesia exported 523,807t of NPI to China in January, up by 55pc year on year, customs data show. And Chinese NPI output rose by 11.5pc on the year to 36,000t of nickel metal equivalent in January, according to data compiled by Argus.
Also said to be discouraging large-scale buying are a volatile market, with cash-to-three-month nickel spreads trading north of $200/t over the past four weeks and consistently in a wide contango — a premium of forward prices to prompt values.
"Financiers cannot afford to hold metal in the current climate," a market participant said.
Until the decline in February, trading companies and analysts were of the view that up to 70pc of the physical nickel supply chain was priced at a discount to the LME three-month contract, with much of Asia using Chinese NPI prices as a de facto benchmark and adding premiums to buy and sell the suite of Class 2 and intermediate products. As the three-month nickel contract traded close to and even above $30,000/t in the two months before the decline started, all other battery metals were seeing falls, with NPI selling at some of the sharpest discounts to refined nickel.
The recent drop in LME nickel prices has raised hopes that the benchmark may have started aligning itself to the physical market again, after a year of dislocation driven by thin liquidity and its exclusive affiliation to the shrinking Class 1 market. Analysts have noted that increased cash selling in recent trading implies physical hedging is returning to the LME market.
But despite the possible normalising of prices, further volatility is likely in the near term. The LME is set to restart nickel trading during Asian hours on 20 March, while the Chicago Mercantile Exchange is looking to launch a rival nickel contract and commodity trading company Trafigura is facing a shipment fraud scandal. A uniform direction is unlikely, and prices could yet return to swinging wildly again.
