Analysis and Forecast of Nickel Price Trends in H1 2024: Macroeconomics, Industry Chain, and Trade Flows

The trend of nickel prices in H1 2024 overall presented an inverted "V" shape. The performance of nickel prices in H1 this year can be summarized as a rise followed by a fall. At the beginning of the year, nickel prices continued the sideways low trend from Q4 2023, with the lowest nickel prices touching 122,000 yuan/mt (SHFE nickel) and overseas futures reaching a low of $15,850/mt. Subsequently, nickel prices rose to the highest point since Q3 2023, reaching 160,500 yuan/mt (LME: $21,750/mt) from February onwards. This article will review the nickel price trend in H1 this year from multiple dimensions and predict the annual nickel price trend using SMM data.

I. Macroeconomic Disturbances on Commodity Prices

1. What is Macroeconomics?

In recent years, macroeconomic sentiment has increasingly impacted commodities. Simply put, macroeconomic factors include policies, economy, geopolitics, and more. Essentially, aside from geopolitical conflicts, most macroeconomic factors ultimately reflect long-term fundamentals, which are the market's supply and demand relationship. Currently, for nickel, due to the gradual improvement of the nickel industry chain, downstream demand sectors are relatively fixed, and with little change in demand variables, supply factors determine the price. For the current market, supply variables are more confidently grasped by the industry and market.

2. The Direct Impact of Policies on Supply and Demand

First, let's focus on the nickel industry chain itself. In the global distribution of nickel resources, Indonesia accounts for 43% of the world's total nickel resources. It is the largest supplier of nickel elements to China and the world. From the concentration of enterprises in mining to downstream processing and smelting, Indonesia's nickel industry is still mainly concentrated in the upstream segment. However, the involved sectors have expanded from the original NPI and stainless steel to high-grade nickel matte, MHP, nickel sulphate, electro-deposited nickel, and other sectors. Its influence on the global nickel industry map has further increased. This means that changes in the development direction of Indonesia's nickel industry, adjustments in investment policies, and other factors will have a critical impact on the supply of nickel elements.

The rise in global nickel prices in H1 this year is the best example to support the above view. Since Q3 last year, Indonesia's RKAB approvals have frequently encountered progress obstacles, together with a certain reduction in supply across various segments of the nickel industry chain in Q1. This led to a gradual narrowing of the global market's expectations for an oversupply of nickel raw materials, with some extreme views even suggesting a shift in the supply-demand surplus pattern within the year. The change in the supply-demand pattern provided a natural upward drive for nickel prices, which were still at a cyclical low.

On the other hand, in H2 2023, the market's consensus on the expansion of global nickel deliverable brands has become more consistent. The market generally believes that with the impact of a large number of newly commissioned Chinese electro-deposited nickel, the number of deliverable brands will continue to increase. However, as shown in the figure below, LME deliverable brands shrank from over 1 million mt at the beginning of the year to 677,600 mt. This is because, under the deepening sanctions by Europe and the US on Russian metals, the deliverable attributes of Russian nickel were damaged, ultimately leading LME to start restricting its delivery in LME warehouses worldwide. Meanwhile, with the decline in nickel prices, global high-cost nickel producers will gradually enter the elimination process. Among the registered brands of LME, a considerable proportion of refined nickel exists in non-plate forms, facing a narrow range of use and less economic efficiency compared to nickel plates, making them more susceptible to impact during the industry elimination process.

3. Macroeconomic Factors Influence Market Investment Sentiment: The Trading Logic of US Fed Rate Cuts

Undoubtedly, the most central and hottest topic in recent years has been the "US Federal Funds Rate." Given the hegemonic position of the US and the dollar globally, US interest rate hikes or cuts have been a continuous concern for the market. Starting in H2 2023, against the backdrop of continuously declining inflation data, the market began trading on the expectation that the US Fed would initiate rate cuts in 2024 and cut rates multiple times. After two quarters, the current market expectation is that there will definitely be a rate cut within the year, with the probability of a rate cut in September being increased.

Typically, when the economy slows down or enters a recession, the US Fed responds by cutting interest rates. Recent data indicates that the US labour market is gradually weakening. The most direct data is the June non-farm payrolls, which showed employment at 206,000, but the previous figure was significantly revised down to 218,000. The unemployment rate rose from 4% to 4.1%. The change in the unemployment rate is close to triggering the "Sahm Rule" recession signal, raising concerns about the risk of a US economic recession. Generally, the US Fed's rate-cutting cycles occur during or around periods of US economic recession. Since the 1990s, whether it was the 2000 internet bubble, the 2008 subprime mortgage crisis, or the 2020 COVID-19 pandemic, the US has experienced significant recessions. Therefore, the key to this rate-cutting cycle is to observe whether the rate cuts will lead to a soft landing or occur after a recession.

Reviewing the most recent rate cut: the rate cut in 2019 under the backdrop of a "recession." In 2019, the US Fed conducted a precautionary rate cut based on the backdrop of a "possible recession." Taking crude oil and copper as examples of commodity trading patterns, crude oil and copper weakened under recession trading, began to oscillate upward during the economic recovery period, and ushered in a commodity bull market. Nickel's trend in this rate cut cycle was similar to that of copper, and due to the dual effects of its own fundamentals and speculative funds, nickel prices reached a historical high in the first quarter of 2022. The subsequent 2023 can be summarized as a period of nickel price correction. Entering 2024, nickel prices started from a low point and fluctuated according to the supply and demand logic of the industrial chain and macro sentiment.

II. Impact of the Industry Chain on Nickel Prices

As a mature commodity, nickel has a well-established upstream and downstream structure, with each segment influencing one another, ultimately reflecting on nickel futures prices. Entering 2024, nickel ore has become the core focus of the industry chain this year, with uncertainties at the mining end directly affecting refining expectations at various stages. On the other hand, MHP and high-grade nickel matte, as key raw materials for the "booming industry" of NEVs, continue to attract market attention this year.

III. Trade Flow under SHFE-LME Price Spread

Since the extreme market conditions, nickel prices have consistently been stronger in the overseas futures market compared to the domestic market. In February 2024, the short-term supply-demand structure shift brought by the traditional Chinese New Year holiday, together with the impact of the registration and listing of domestically produced electro-deposited nickel as a deliverable brand in the overseas futures market, led to a brief period where the domestic market was stronger and the overseas futures market was weaker. However, as the domestic holiday ended and producers resumed normal production and supply levels, the price spread between the two markets widened again due to weak domestic demand recovery, strong overseas demand, and improving macro sentiment. The continued widening of the price spread, together with persistently weak domestic demand, ultimately led to a significant increase in nickel exports by domestic producers starting in Q2 this year. According to customs data, China exported a total of 44,241 mt of refined nickel in H1 2024, compared to only 10,499 mt in 2023, a YoY surge of 210%. On the other hand, SMM calculations show that China's net import of refined nickel in H1 2024 was -924 mt, confirming our assessment that China is gradually becoming a net exporter of refined nickel.

On the other hand, due to the SHFE/LME nickel price ratio remaining excessively high, domestic nickel companies have concentrated on exports, leading to a sharp decline in domestic supply. According to SMM statistics, domestic refined nickel inventory has seen continued destocking for two consecutive months, with a cumulative destocking of 11,261 mt. In contrast, LME inventory has continued to accumulate, surpassing 100,000 mt. As of today, LME nickel inventory stands at 104,214 mt. This round of LME inventory accumulation is mainly in Asia, with South Korea, Singapore, and Taiwan experiencing a surge in inventory in Q1 2024. European warehouses, affected by sanctions on Russian nickel, have seen a relatively slow increase, with overall inventory levels remaining relatively stable. This presents a problem: overseas prices may gradually weaken under inventory pressure, while domestic prices may rebound amid continued destocking. Long-term import losses have led to a tight supply of domestic refined nickel, exacerbating the accumulation of overseas inventory. The decline in overseas prices is greater than the domestic decline, creating an opportunity for cross-market arbitrage—long domestic, short overseas.

Ps: The theoretical basis of intercity arbitrage is the import and export trade of spot goods. Under normal import and export trade, there is a normal level of price ratio between domestic and foreign spot nickel. When there is a discrepancy between the two markets (such as time difference, fund speculation, large account movements, etc.), the price ratio of the simultaneous contracts of SHME and LME will deviate from the normal level, causing distortion. At this time, intercity arbitrage transactions can be carried out. Due to the price ratio distortion between the two places, related traders are driven to profit through import and export. A large amount of logistics will readjust the prices of the two places to balance in a short period of time. Therefore, "distortion entry - normal closing" completes an arbitrage transaction.

IV. Future Fundamentals of Nickel

Supply side, according to the SMM survey, H1 2024 domestic refined nickel total output reached 158,100 mt, up about 40% YoY. SMM estimates that this year's total domestic electro-deposited nickel output will reach 340,000 mt, indicating more refined nickel output will be released in H2. Overseas, the SMM survey shows that in H2 this year, an additional 50,000 mt of refined nickel is expected to be produced in Indonesia. The global refined nickel new capacity will be put into production, and electro-deposited nickel output will still be in the ramp-up stage in 2024, with supply pressure not easing compared to 2023.

Demand side, refined nickel demand in H1 2024 increased by 9% YoY. Downstream demand by industry shows that the alloy sector demand remained stable overall, supported by military orders. According to SMM calculations, nickel consumption in the alloy and Special Steel sectors from January to June this year increased by 14% MoM compared to H1 2024. However, as mentioned earlier, due to the impact of weak domestic demand, refined nickel demand in the alloy sector increased slowly, but the growth rate was far less than the supply. Therefore, with downstream demand rising slowly and upstream supply expanding too quickly, the expectation of strong global refined nickel supply and weak demand in H2, together with the rapid expansion and production of other nickel smelting products in the industry chain, will further increase the surplus of nickel in H2 compared to H1.

V. Summary

Based on the above analysis, it is expected that in H2, with the increase in supply pressure, the nickel market will face further price fluctuations. SMM data forecasts on the annual trend of nickel prices can help market participants better grasp the trading rhythm and make reasonable investment decisions.