Metals News
Nickel stocks hit fresh peaks on fallout from Chinese port probe
industry news
Aug 4,2014

Fri, 1 Aug 15:18:00 GMT

* Credit for metals financing deals difficult after probe
* Expired deals mean nickel stocks shipped to LME warehouses
* Chinese refined nickel exports surge 170 pct in June
* Graphic on LME nickel stocks:

By Eric Onstad and Polly Yam

LONDON/HONG KONG, Aug 1 (Reuters) - Nickel inventories are hitting record highs as hidden stocks leave China following a fraud probe at Qingdao's port, showing supplies are plentiful despite a halt to shipments from top exporter Indonesia.

Investors have bet on shortages developing after Jakarta in January banned unprocessed ore exports, spurring a price rally of 56 percent from the start of the year up to a May peak.

But after years of overproduction and surpluses, there are more legacy stocks of refined metal than some people had reckoned and these are now appearing in warehouses of the London Metal Exchange (LME).

The rising inventories have weighed on benchmark prices , which have shed 15 percent since hitting their 27-month high of $21,625 a tonne in May. Analysts say prices will continue to struggle if stocks keep increasing.

"We're at new record (stocks) levels, which says this switch from big surplus to big deficit on the Indonesian story is a work in progress, it's not done yet," said analyst Stephen Briggs at BNP Paribas in London.

Nickel stocks in LME-registered warehouses touched another record peak on Friday of 317,628 tonnes. They have increased 12 percent over the past two months alone and more than doubled since the start of last year.

Part of the recent rise is a knock-on effect from suspected commodity financing fraud at China's Qingdao port, a case that prompted banks to be more cautious about providing credit for such deals.

"There was quite a bit of nickel that was being financed in bonded warehouses ... and it’s now extremely difficult to obtain LCs (letters of credit) to finance metal," said Citi analyst Ivan Szpakowski in Shanghai.




Chinese authorities launched an investigation in early June into whether a private metals trading firm, Decheng Mining, and related companies used fake warehouse receipts to obtain multiple loans secured against a single cargo of metal.


No hard data exists about levels at Chinese bonded warehouses, but analyst Vivienne Lloyd at Macquarie estimated there was 50,000 tonnes of nickel in the depots as of June.

"If no one's willing to open another letter of credit and allow you to roll the position, then you need to deal with your metal and sell it," Lloyd said. "If no one wants to buy it from you in the bonded warehouse, your next option would be the LME."

The liquidation of nickel financing deals showed up in Chinese trade data in June, where refined nickel and alloy exports spiked by 170 percent year-on-year to 18,065 tonnes. [ID:nEAP000883]

Much of the recent inflow at LME warehouses has been in Asia, with metal arriving at South Korea's Gwangyang warehouses surging tenfold to 5,586 tonnes over the past two weeks.

Lacklustre demand in China has also been a factor, industry sources said.

An executive at a large Chinese trading firm in Shanghai said low seasonal demand had since June been cutting purchases of bonded stocks by stainless steel mills, the biggest end-users in China.

“A lot of bonded stocks are set to leave China,” the executive said, declining to give a specific forecast.

He added that Western producers of refined nickel were likely to find other destinations, including the LME warehouses, for their metal due to reduced buying from the Chinese.

While the refined nickel market is not yet showing any shortages after Indonesia halted supplies, it will be only a matter of time for the impact to be felt, analysts said.

"The deficit has emerged but has not shaken through the whole value chain. It is currently at the ore stage," Lloyd said.

Higher ore prices are expected to spur the closure of nickel pig iron producers in China starting this month, which will eventually cause tightness in refined metal, she added.

Russia's Norilsk Nickel , the world's biggest nickel producer, expects shortages to kick in at the end of the year.

"It is expected that the market will shift to a deficit starting from the fourth quarter, which should lead to LME nickel stocks declining," Norilsk said in an emailed comment.

(Additional reporting by Melanie Burton in Sydney and Polina Devitt in Moscow; Editing by Dale Hudson)

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