Viewpoint: High nickel premiums the new normal

European nickel premiums scaled all-time record highs in 2022 as the Russia-Ukraine war, rising underlying nickel prices on the London Metal Exchange (LME) and declining stocks in LME warehouses changed the dynamics of the spot market.

The Argus assessment for the 4x4 inch nickel cathode in-warehouse Rotterdam premium averaged $1,472.65/t this year, up by more than five times relative to $258/t in 2021, with the assessment last at $700-1,200/t. The average premium for full-plate cathode this year was $661/t, more than 11 times higher than last year's $57/t, being last assessed at $200-250/t. And the in-warehouse Rotterdam premium for nickel briquette surged to an average $1,195.25/t this year, an eight-fold rise compared to 2021, with the assessment last at $650-750/t.

Premiums eased after peaking across the board to more than $3,000/t in the immediate aftermath of the LME nickel market collapse in March, and have since been steady at current levels throughout the fourth quarter amid uneven trading patterns and tight availability. Premiums strengthened briefly as the LME considered imposing an outright ban or volume-based restrictions on Russian nickel warrants held in its warehouses, but stabilised soon after the LME decided to maintain status quo regulation.

High premiums this year have also been linked to wild price shifts in nickel prices on the LME, as poor liquidity has weighed on trading to the extent that large swathes of the market consider nickel prices to have decoupled from physical fundamentals. Official cash nickel prices traded between $21,275.00/t and $31,062.50/t during the fourth quarter of this year.

"Pretty much everyone accepts the current level [of premiums] is the new reality", a trader said.

Heading into 2023, market participants in Europe mostly expect spot premiums to hold stable at minimum on the uncertainty around Russian supply — the biggest source of European melt — in addition to sharp swings in benchmark nickel prices and the ongoing inflationary pressures on logistics and freight. Some buyers in Europe are heard to be favouring spot purchases over the deployment of term-contracts, particularly as underlying demand from stainless steel producers is expected to remain weak amid an economic downturn in the bloc.

But traders cautioned that a uniform direction to premiums is unlikely in the near-term as the market continues to be volatile. Sparse stocks in LME warehouses, which recently touched a 14-year low and have otherwise amounted to an availability of less than two weeks for much of this year, have driven the strength in premiums. But a downside to premiums could emerge from large stockpiles of Russian warrants accumulating in LME warehouses to artificially alter nickel prices, they warned.

Russian-origin nickel has consistently accounted for less than 5pc of all LME nickel warrants through the fourth quarter, according to several market participants surveyed by Argus, suggesting that consumers were still purchasing the material directly. And while Russia's major nickel producer Nornickel has had to rethink supply chains and logistics to support its operations while also evaluating settlement terms and lending capabilities it has with Western banks following the Ukraine war, it has remained on track to meet its annual nickel production guidance of 205,000-215,000t this year.

"One thing that Nornickel has in its favour is that it is a low-cost producer for Europe", a second trader said. "They have planned their sales conservatively and can thus also cope with any production losses."

Recent unconfirmed reports of Nornickel planning cuts to supply next year may be driven in part by issues around delivery of spare parts for its machinery and equipment that it acknowledged at the end of the third quarter. A hit to supply as a result of these problems is likely to affect European availability in what is an already tight market, providing upside to premiums, especially as other Class 1 producers are more expensive to buyers in the continent.

Non-Russian nickel created a unique divergence in spot nickel trading in 2022 — a first for the market — as some buyers and sellers self-sanctioned Russia after the Ukraine war. Cathode products in LME warehouses of non-Russian origin have particularly been subject to this separation, leading to wide spreads with premiums for these products, often reported to be up to five times higher relative to Nornickel material. Market participants expect this "mini" market to converge with the majority Russian-origin nickel trading over time, but warned that the bifurcation would persist for as long as the Ukraine war rages on.

The economic prospects of top nickel consumer China in 2023 will also influence the direction of European premiums in the new year, traders agree. A scenario of prolonged Chinese Covid-19 restrictions and lockdowns is likely to lead to lower primary nickel demand in the country, leading to a redirection of stocks into European warehouses, which would represent a possible downside to premiums. Amid the rising supply and use of low-grade nickel products in Asia, European market participants will further be keeping an eye on the extent of the Class 1 nickel surplus in the region.

By Raghav Jain