Column: Surging exchange stocks pile the pressure on nickel: Andy Home

Panoramic Resources

18/01/2024 24:00

(Repeats Jan 17 story without change)
    By Andy Home
       LONDON, Jan 17 (Reuters) - Nickel was the worst
performer among the London Metal Exchange's (LME) base metals
last year by some margin as the market priced in a wave of new
Indonesian supply. 
    Indonesia's mined production rose by 29.2% year on year in
the first 10 months of 2023, according to the International
Nickel Study Group. Nickel demand is rising fast thanks to its
use in electric vehicle batteries but nowhere near the pace of
supply growth. 
    Until recently the growing supply surplus was confined to
intermediate products such as ferronickel and matte rather than
the high-purity refined metal that trades on the LME and the
Shanghai Futures Exchange (ShFE). 
    That is changing as stocks rise on both exchanges, narrowing
the pricing gap between refined metal and other forms of nickel.
    LME three-month nickel  CMNI3 , currently trading at $16,050
per metric ton, is now eating into the cost curve and
hard-pressed producers could face more margin pain. 
    
    STOCKS SURGE
    Low LME stocks were the anomaly in nickel's bear narrative
for much of last year. 
    They were a symptom of the disconnect between Indonesia's
rapid expansion of intermediate products capacity and a
stubbornly tight refined metal segment of the supply chain. 
    That started to change in the fourth quarter of last year.
LME-registered inventory has grown rapidly from 37,170 tons at
the start of September to 69,510 tons now. 
    A significant driver of that has been the amount of Russian
metal arriving in the LME system. 
    Warranted stocks of Russian nickel increased from 7,068 tons
at the end of August to 17,772 at the end of December, likely
reflecting a combination of weaker demand and self-sanctioning
by Western users. 
    
    CONVERTING SURPLUS
    But the real game changer is the rising tonnage of Chinese
metal in the LME storage system. There was no warranted
Chinese-branded nickel at all as recently as August. By the end
of December there were 6,408 tons.
    That's down to the Chinese build-out of capacity to convert
Indonesia's stream of intermediate products into refined metal
that is LME-deliverable. 
    Macquarie Bank estimates that 250,000 tons of annual
conversion capacity will be online by the end of this year. 
    The advances in processing technology have coincided with
the LME's efforts to boost stocks liquidity after the market
blow-out in March 2022. 
    The LME has listed two new Chinese brands of nickel produced
by Huayou Cobalt and Jingmen Gem with annual capacity of 6,600
and 10,000 tons respectively. They join Jinchuan and Yintai Cash
on the LME's good delivery list. 
    All produce full-plate cathode, LME stocks of which have
nearly doubled since the start of December to almost 34,000
tons. 
    But it's not only the LME that is seeing more Chinese metal
turn up. 
    ShFE inventory, which is highly dependent on Chinese nickel
brands, hit a multi-year low of only 560 tons at the end of May
2023. Stocks have since mushroomed to 14,193 tons, the highest
level since January 2021. 
        
    BEAR PRESSURE
    Both exchanges will welcome the boost to stocks liquidity
provided by Chinese converters. 
    However, it's not good news for other producers. 
    The LME nickel price is already hovering near three-year
lows. Hopes for a price lift from index rebalancing at the start
of the year have been dashed, with little discernible impact
from the expected buying.
    Higher-cost operators are struggling. 
    Australia's Panoramic Resources  PAN.AX  went into voluntary
administration in December. Its administrators said on Jan. 8
that operations at the Savannah nickel project would be
suspended because the "prospect of achieving a near-term
turnaround of operations and finances is low".
    First Quantum  FM.TO  this week announced that it will cut
jobs and production at its Ravensthorpe mine in Australia
because of a "significant" downturn in prices that it expects to
last three years.
    Even majors such as BHP Group are feeling the pinch. "We are
working hard to remain globally competitive in a very tough
operating environment," said Jessica Farrell, president of the
company's Nickel West division.   
    The problem is that there is no sign of the Indonesian
nickel juggernaut coming to a halt any time soon. 
    Indeed, Macquarie analysts note that "surpluses remain our
base forecast for the overall nickel market all the way out to
2027, most likely in all main product categories."
    As more of that surplus is transformed into refined metal,
exchange stocks will rise further, piling ever more pressure on
the nickel price. 
    
    The opinions expressed here are those of the author, a
columnist for Reuters.
  

 (Editing by David Goodman)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))