Where Is Nickel Market Heading after Back on Track?

SHANGHAI, Mar 23 - LME nickel have touched limit down for four straight trading days after resuming market, while SHFE nickel also moved all the way down. All of these indicate that the nickel market, after steep rises and falls, have basically returned to the fundamentals.

As of March 23, the average spot price of refined nickel stood at 212,400 yuan/mt, up 0.62% from a day ago.

Also it the spot market, the premiums of Jinchuan nickel stood at 3,500-3,900 yuan/mt, flat from a day ago. Premiums of NORNICKEL nickel recorded 3,000-3,700 yuan/mt, down 250 yuan/mt from yesterday. Import losses turned into profits since yesterday, while the customs clearance required some time, hence market supplies will stay tight for a while. The premiums dropped because the traders lowered their offers in order to liquidate their stocks by the end of the month and in light of rising futures prices.

Below are opinions from futures firms regarding nickel market review and prospect.

Will LME nickel fall further after hitting limit down four trading days in a row after resuming market?

Huishang Futures: As of March 21, LME nickel touched limit down at $31,380/mt after opening. Referring to the nickel price level before the short squeeze on March 7, LME and SHFE nickel should have been moving around $29,000/mt and 187,000/mt respectively. Currently, nickel prices are still on course to normal as both LME and SHFE nickel prices are high and LME-SHFE nickel spread has room for narrowing.

On the fundamentals, the impact of the Russia-Ukraine conflict sustains, and overseas nickel supply worries still exist. High spot premiums and the absolute low inventory would give support to nickel prices. Therefore, after LME nickel fully returns to the fundamentals, the nickel prices are unlikely to fall further. And in accordance with the 15% price move limit, LME nickel is expected to drop further by 1-2 days and will then gradually stabilise between $25,000-30,000/mt.

First Futures: LME nickel dropped from $48,078/mt to the current $31,380/mt in four trading days after resuming market, a cumulative drop of 34.73%. SHFE/LME price ratio has also been significantly repaired and stood at around 6.41 for the moment. From the perspective of price ratio alone, it can be told that the possibility of LME nickel touching limit down again is quite low.

China Futures: In terms of SHFE-LME spread, LME nickel may drop by another 10%, which also means that LME nickel is unlikely to hit limit down again after opening today. From the point of SHFE nickel, the recent prices have been relatively stable with intense wresting between longs and shorts, which is basically in line with market expectations. Hence after LME nickel dropped to the level of SFHE nickel, the prices are unlikely to fall significantly further. And the futures moves will be subject to the fundamentals.

Guolian Futures: In terms of SHFE/LME price ratio, there may not be much room for LME nickel to decline further. After touching limit down four trading days in a row, the SHFE/LME price ratio has been repaired to a large extent. And SHFE nickel is relatively firm, indicating that the market has been fine with the current price level in the short term.

Nickel futures is expected to return to the fundamentals in the short term. And how is the market balance for the moment? Will nickel prices remain high in the near future?

Huishang Futures: Nickel prices were severely divorced from the fundamentals before, with excessively high nickel prices and violent fluctuations in futures market that led to a near standstill in the spot market. In terms of the current situation, nickel ore prices and import losses are still high, keeping pure nickel supply tight.

Although there is a certain recovery on the demand side, the downstream is still waiting for the price to return to rationality. On the one hand, nickel sulfate and precursor plants are considering production cuts due to high raw materials prices. On the other hand, the recurrence of domestic pandemic has affected the transport and transaction of spots. Furthermore, demand is the stainless steel sector is less than expected. The overall supply and demand are both weak.

However, the short-term supply shortage is still the dominant logic of nickel fundamentals, especially in the ongoing conflict between Russia and Ukraine as well as escalating sanctions against Russia, evidenced by high spot premiums and absolute low inventory. Therefore, SHFE and LME nickel prices will remain high after the market returns to the fundamentals.

First Futures: The risks of short squeeze event have been digested, but as is mentioned in our earlier analysis, the shorts have not completely left the futures market. In other words, the playfield for the tug-of-war between shorts and longs is still in place.

From the downstream performance, the recent high nickel prices inhibit downstream demand, and raw material prices moved up. The narrowing profits have also depressed the production enthusiasm of domestic steel mills, resulting in more maintenance and production cuts.

As for nickel sulphate, due to less-than-expected high-grade nickel matte output and the extreme shortage of raw materials, the premiums of domestic nickel briquette have risen to 7,000 yuan/mt, much higher than that of Jinchuan nickel and NORNICKEL nickel.

In addition LME inventory is still declining, and the current inventory is also at its new low in more than a decade. So, on the fundamentals, structural opportunities still exist in the nickel market, and the support is still relatively strong.

China Futures: The overall supply in the nickel market is relatively tight, with fewer market sources. But the current nickel fundamentals front is still facing more uncertainties.

The biggest uncertainty on the supply side of nickel comes from NORNICKEL nickel, which remains a poor supply channel due to European and us sanctions against Russia.

ooking forward, if the NORNICKEL nickel supply channel smooths, nickel prices will then have room to fall further. Nut if NORNCIEL nickel could not enter the market soon, nickel prices are expected to stand high.

Guolian Futures: At present, LME nickel inventory is still falling though it has been low, while SHFE nickel inventory rallies slightly from a low of nearly 2000 mt. However, pure nickel supplies in the domestic market are tight, and the situation of low inventory and high premiums will remain so for some time.

There are multiple paths to the resolution to the fight between longs and shorts, especially in light of huge open interest. One thing is certain, nickel market will face disturbances if market participants have to source goods from somewhere else in order to deliver the futures contracts before the capacity reaches designed operating rates. Currently, pure nickel sources have been relatively scarce in the market, and the supply of NPI will also be tight for some time.

It is expected that NORNICKEL nickel will flow into China in large amounts amid Russian sanctions. Will SHFE nickel underperform LME nickel under this background in the future?

Huishang Futures: We see three main ways in which the Russia-Ukraine conflict could have an impact on nickel prices.

1. The sanctions on Russian energy production will impact nickel prices through futures market sentiment and the cost side of the industry chain, raising price hike expectation. Such impact is mainly short-term, and is highly correlated to the environment changes.

2. The sanctions will result in regional supply shrinkage of NORNICKEL nickel. For example, the overseas plants of NORNICKEL were shut down, and the impact may gradually appear in the medium term.

3. The escalation of sanctions will bring about deep supply chain problems. If the conflicts continue, it may lead to regional mismatch between supply and demand of NORNICKEL nickel in the long run.

As a result of the sanctions, NORNICKEL nickel exports to Europe and the US have fallen, and the supply void in Europe and the US may be filled up by Japan, Canada, Australia and Norway.

As China and Russia can use the CIPS system for settlement, the impact on China is insignificant. In the long run, with the continued promotion of RMB settlement, part of the exports to Europe and the United States is likely to flow to China, bringing a boost in domestic nickel supply. And the global nickel market trade structure will be transformed, and SHFE nickel will keep underperforming LME nickel. Nonetheless, the impact is expected to materialise after longer period of time, and it also depends on the progress of the tensions between Russia and Ukraine.

First Futures: The Russia-Ukraine conflict has led to Russia being sanctioned by Western countries, and the market believes that a large amount of NORNICKEL nickel will flow into China later, but we believe this will take time.

Because new trade patterns need to be re-established, such as the issue of RMB settlement and how to renew previously signed long-order trade, which is a challenge for traders and customs that needs to be figured out.

In addition, China imported 46,000 mt of NORNICKEL nickel last year, which is only 22% of the annual output of 210,000 mt of NORNICKEL nickel. And it is difficult for NORNICKEL to find new trade partners in China in a short period of time. But one thing is certain, that is, under the premise that Russia is subject to sanctions from the West, more NORNICKEL nickel will flow to China.

Supply and demand in China and abroad are relatively strong until NORNICKEL nickel flows to China. Whether the flow of NORNICKEL nickel to China will result in continuous underperforming of SHFE nickel over LME nickel will depend on the overall supply and demand situation. After all, Tsingshan Group will have to use more high-grade nickel matte to exchange for refined nickel for the delivery of futures contracts. Hence domestic supply will continue to be tight. So whether overseas fundamentals can continue to be better than the domestic is not a foregone conclusion.

China Futures: If NORNICKEL nickel is able to flow into China in large quantities, there will be an abundance of nickel supply in China and a shortage of nickel supply abroad, which will make the prices of SHFE nickel consistently lower than that of LME nickel.

However, it will take some time for the market to find a reasonable SHFE/LME price ratio for nickel, during which the price ratio is expected to fluctuate more sharply.

In addition, there is also strong uncertainty about the ability of NORNICKEL nickel to circulate in the market, and Western sanctions against Russia still need to be gradually digested by the market, which will also bring challenges to the stability of SHFE/LME nickel price ratio.

Guolian Futures: The escalating conflict between Russia and Ukraine has created supply concerns for nickel. Although several countries have started to impose sanctions on Russia, the US and Europe may not take extreme sanctions to target NORNICKEL nickel given its strategic metal status and its large share of global nickel supply (about 8% of global supply in 2021). This remains the case especially at present.

However, the normal supply of NORNICKEL nickel may be limited by constraints on other aspects such as transportation and payment. Nearly 40% of NORNICKEL nickel was exported to China in 2021 (including NORNICKEL nickel plate sources from LME warehouses), with a probable increase in 2022.

Globally, the more substantial increase in nickel supply is likely to occur mainly in Indonesia in the near future, particularly Indonesia NPI and nickel matte. This part, in turn, is also more linked to the China market. Therefore, the overall supply of nickel in China tends to increase, but it also corresponds with the fact that domestic demand has been firm. To sum up, it still remains uncertain as whether SHFE nickel will weaken.