Demand pick-up could save nickel prices from dismal 2016 prices

By @chelean on
nickel ore in a ferronickel smelter
A worker displays nickel ore in a ferronickel smelter owned by state miner Aneka Tambang Tbk at Pomala district in Indonesia's southeast Sulawesi province March 30, 2011. The country accounts for roughly 7 percent of the world's total nickel mine output , according to Reuters data. Reuters/Yusuf Ahmad

In the past years, the prices of metals have been highly dependent on economic data from China. The prices plummeted when stainless steel producers minimised their ore purchase when the country’s local economy crashed in July. Economic columnist Andy Home is among those who believe that the future of metals, especially nickel, lies in a demand pick-up from the import leader.

Although it is now impossible to see a completely recovered price for nickel for the remaining quarter of this year, a renewed consumption that would come from an improved Chinese economy could still give the metal a better start next year.

Home also said that although the current demand rout in the metals segment is as not as severe as that of the 2008-2009 Global Financial Crisis, several things are making the demand drought a more disconcerting issue for investors.

“The irony is that nickel's supply-demand dynamics really are tightening. The Indonesian nickel ban has been in place for 21 months now, stopping the flow of the nickel ore that feeds Chinese NPI producers. Stocks of ore, particularly the high-grade ore that other countries such as the Philippines can't replace, are fast running out,” he wrote in Reuters.

Add to this the overflowing supply from various parts of globe, all trying to sell their products amid the shaky market. Another key difference, added Home, is that stock levels seven or eight years ago are much lower than those of today. This scenario creates a massive supply overhang that stifles prices “ever lower even before the Shanghai stock market submitted to a free fall.”

“Well, a lot of [these stocks] came from China, flushed out of the shadow financing trade by the Qingdao port scandal and the resulting mass movement of metal to safe-haven storage,” Home explained, pinpointing the Qingdao scandal in June 2014 that led to enhanced inventory at the London bourse.

It is also good news that Indonesia is still adamant on continuing the ore ban despite criticisms from Japan and China. The absence of supply from the country is very in keeping with the shaky demand segment and enhanced production volume coming from producers. Also, economists believe that the ban could still pave the way for a supply deficit should the demand pick-up finally happens.

In 2014, the unexpected announcement of unprocessed ore prohibition in Indonesia pulled nickel prices up to its highest levels, making it the best performing base metal of the year. It was also the year when then-ore explorer Amur Minerals (London AIM: AMC) saw their share prices skyrocket at unexpected levels, as investors were looking for future suppliers that could save the segment. Its share prices increased up to more than 100 percent in May when it obtained pre-production license from the Russian government that made it into a full-blown mining company.

Stronger dollar value against foreign currency is also making nickel prices unpalatable to traders. Most commodities are priced in the American currency which makes them more expensive to purchase using foreign money.

On last London Metals Exchange (LME) trading, nickel prices closed 2.39 percent lower at US$9,785 [AU$14,104] per metric tonne.

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