Spot nickel premiums resist high stocks pressure

High nickel stocks in Europe are likely to prevent a sharp drop in spot nickel premiums in the coming weeks, despite the backwardated June and July contracts on London Metal Exchange (LME).

The LME nickel contracts for June and July delivery were trading in contango at the start of this month, but the spreads started to tighten on 2 May and swung into backwardation on 7 May. The June-July backwardation has been widening and traded as high as $17/t at 10:47 BST today.

Backwardation could cause a fall in spot premiums — which are paid on top of LME nickel contracts — as metal holders are under pressure to liquidate stock because prices for forward deliveries are lower than for the prompt LME contract.

But the June-July backwardation is unlikely to cause nickel spot premiums to fall because there are "still plenty of stocks around", one trader said.

But many of these nickel stocks are off-warrant as the metals are stored in non-LME registered warehouses. This means the LME stocks may not accurately reflect supply in the market.

"It just adds to your financing costs if you are short, which is something to watch and be careful of," a second trader said. "There is still enough time to prepare."

The Argus weekly assessment for full-plate nickel premiums in-warehouse in Rotterdam decreased to $200-220/t on 9 May, from $220-240/t a week earlier.

Most of the nickel contracts for forward delivery have been trading above metals for prompt shipment this year. This has incentivised financing business, and the changes from contango to backwardation could increase the holding costs of nickel, and in turn pressure stock holders to liquidate stocks at a lower premium for June-July.

LME on-warrant stocks have been falling since the backwardation began. Nickel on-warrant stocks stood at 104,034t on 7 May, and have since fallen by 4,002t or 3.8pc to stand at 100,032t. This has put LME nickel stocks at their lowest since 2012. Cancelled stock increased by 432t to 69,186t yesterday, up from 68,754t on 7 May.

Backwardation generally occurs when there is a supply shortage in the near term, but many market participants believe the June-July backwardation has been created by some position holders.

"It's one particularly short entity — people in the far east get incredibly short, and then they have to borrow it back," one broker said.

Other market participants attributed the backwardation to institutional investors. "A few hedge funds, banks have dinner, and suddenly there's a backwardation," the second trader said.