Tax cuts, potential higher NPI supply expand backwardation of SHFE nickel contracts

SHANGHAI, Mar 5 (SMM) – The backwardation of SHFE nickel March, May contracts widened as investors expected China's value-added tax (VAT) cuts to reduce costs in back month contracts. 

Expectations of higher supply of nickel pig iron (NPI) in the short run also grew bearish sentiment on prices of nickel for May. At the same time, low inventories of refined nickel deterred traders from selling, and this buoyed the SHFE nickel front month contract. 

As of CST 11:20 on Tuesday March 5, the SHFE nickel March contract traded some 1,290 yuan/mt higher than the May contract, compared with a price spread of 260 yuan/mt at closing on Monday March 4.

SMM assessed that a 3-percentage-point cut in VAT will lower spot prices of SMM #1 nickel to 102,771 yuan/mt, down some 2,730 yuan/mt from the average spot price on the morning of March 5.

China will cut the manufacturing VAT from 16% to 13%, according to Premier Li Keqiang's annual report to the National People's Congress on Tuesday March 5.