With nickel becoming the best performing base metal of this year amid strong demand, analysts at ANZ warned that the recent rally is "unwarranted" as supply issues are having an exaggerated effect while the demand outlook is looking weak.
Prices hit a one-year high July 18, nearing US$15,000 per tonne. So far this year, the metal has gained more than 37% on the London Metal Exchange and closed at US$14,285/t on Aug. 1 on the LME.
ANZ analysts wrote that news of Indonesia reinstating its ore export ban spooked the market. However, the policy does not kick in until 2022, and several new nickel pig iron and high-pressure acid leech projects are set to hit the market, they added.
Noting the strong stainless steel production in China, which was up 10% in the first half, ANZ analysts warned that the rise in steel output emerged against indications of falling demand and high stocks, adding that the developments may build a case for steel production cuts.
However, ANZ analysts added that the downside appears to be limited at the moment as continually falling nickel inventories are supporting prices while premiums remain elevated. Longer-term electric vehicle market dynamics should also support prices, along with lower stockpiles.
Prices will find support from falling inventories. So far this year, LME stockpiles are down 30%, while inventories on the Shanghai Futures Exchange have collapsed nearly 80%.
"Beyond 2022, we see supply constrained by Indonesia's ore export ban, despite a complete ban of nickel ore exports looking unlikely," ANZ said.
Sanford C. Bernstein analysts wrote that the recent movement in nickel prices is a case of "fundamentals finally overpowering sentiment."
The firm attributed the rally to the reduction in stockpiles; the two-year tumble in global nickel inventories took stocks down to a critical level. Dollar strength, global growth and speculation are also affecting nickel prices, but Bernstein analysts said the recent rally is not in line with the behavior of the nickel price in the last two years.
"Despite the growing acceptance of a looming deficits in the market, the price has not quite reflected this possible outcome. We have argued for some time that the medium to long-term outlook for nickel is one of structural shortage, and it seems that this year the tight outlook for fundamentals is starting to enter today's spot price," Bernstein said.
Assessing the nickel price in a framework that modeled the price as a function of five distinct variables, Bernstein analysts found that nickel is the most sensitive metal showing a positive correlation to net speculative positions, with prices increasing 7% for a one-standard-deviation move up in the net position.
"If we look at the net speculative positions in the market today, we can see that the marked recovery in the nickel price seen over recent weeks has coincided with the move up in the net speculative positions," Bernstein analysts said. "Though the position on the LME is still net short, it has rebounded from the trough seen earlier in the year."
Other analysts wrote of Australian nickel producers seeing counting on demand from the EV sector.
Consultancy AME said in a recent report that BHP Group's recent change in approach for the Nickel West operations in Western Australia indicated it expects strong demand, noting the new 100,000-tonne-per-annum nickel sulfate plant at its Kwinana refinery.
Nickel West now expects about 90% of its nickel to be sold into the lithium-ion battery market by the end of 2019, AME said in the report, although BHP had been actively considering the sale of Nickel West since 2015 after it spun off many of its noncore assets into South32 Ltd.
Elsewhere, consultancy CRU said the burgeoning EV sector has seen Western Australia quickly become a supply hub for hard-rock lithium mining.
CRU analysts said in a recent report that Australian spodumene miners are looking to address the glut of supply coming from the country, noting that companies such as Pilbara Minerals Ltd. are looking at the opportunities. CRU said Pilbara Minerals moderated production at its Pilgangoora mine in June and will continue to do so until October to meet reduced requirements from its off-take partners.
"Both Ganfeng Lithium Co. Ltd. and General Lithium Corp., according to Pilbara Minerals, are facing delays ramping up their spodumene conversion capacity in China. We estimate that mine production will be reduced quarter over quarter by around 20,000 tonnes of spodumene concentrate [or 3,000 tonnes of lithium carbonate equivalent before conversion losses] in the third quarter," CRU analysts said.