LONDON: The London Metal Exchange (LME) three-month nickel price sank to a 2011 low of $16,550 per tonne on Wednesday as the market's dynamics rapidly realign in apparent confirmation of a previously elusive bear narrative.
At the time of the January 2011 Reuters base metals poll analysts were generally unenthused by nickel's prospects.
Although the median forecast was for an 11-percent rise in average prices to $24,251 in 2011, it was the mildest anticipated price increase of any of the LME-traded base metals.
More striking was the fact that analysts expected nickel, and only nickel, to fall in price in 2012 relative to this year.
What was exercising the collective mind back then was the amount of new production capacity that was expected to come on stream over the course of 2011 and 2012. Nickel subsequently spent most of the year gleefully ignoring the script.
LME stocks fell hard over the first half of the year and, after a brief bounce in August, they fell even harder in September and October, by which time they were down by 37 percent, or 50,214 tonnes on the start of 2011. No other LME metal experienced such a consistent drawdown in visible inventory over the same timeframe.
Supply in the first part of the year was defined not by surplus but by a series of unexpected disruptions. Moreover, the big new projects, particularly those using the new high pressure acid leach (HPAL) technology, were a collective no-show.
None of which stopped nickel being caught up in the general Q3 price rout, leaving it clinging on to support around the $17,000 level.
That level was penetrated yesterday and a further price collapse only averted by the collective relief rally that accompanied the promise of dollar liquidity by the world's leading central banks. But for how much longer can nickel defy price meltdown?
The stainless steel input's fundamental dynamics appear to be shifting very fast. LME stocks have stopped falling and actually rose for only the second time this year in November to the tune of 4,398 tonnes.
True, that turnaround was largely due to the cash-date tightness that appeared out of nowhere last month.
The squeeze on short-dated availability has disappeared as quickly as it came but not before triggering heavy inflows of metal into the LME warehouse system.
Arrivals have totalled 12,228 tonnes over the last two weeks, the heaviest "in" side activity this year.
But while occasioned by the need to deliver into November's backwardation, this metal flow points to a deteriorating demand outlook, particularly in the key stainless sector.
Global steel production is slowing, not least in China, and there's no strong reason to think that the stainless sub-sector has somehow decoupled from this broader trend.
Meanwhile, all those new supply projects seem about to hit the market simultaneously.
It is deliciously ironic that after years of delay and technical problems the highest-profile HPAL project, Goro in New Caledonia, is ready to start production exactly at the time of maximum price weakness.
Brazil's Vale has said that the project is now "100 percent" ready to start producing nickel oxide as opposed to the intermediate product it has been selling while a host of operational problems were resolved.
As with London buses, you wait ages for one to come along and then three turn up at once.
The Goro ramp-up will now coincide will the commissioning of the Ravensthorpe project in Australia and with the delayed start-up of the Ambatovy project in MadagaReuters
These new HPAL producers will join new ferronickel operations such as Anglo American's Barro Alto and Vale's Onca Puma. Both Brazilian projects are now building up run-rates.
Suddenly the world looks like it's going to be awash with nickel, just when the world doesn't look as if it's going to need it.
The bear narrative captured in that January analysts poll has suddenly started to look very real.
The nickel price, however, has already outrun that narrative. The cash average this year is already below the conservative median of the January analysts poll and three-month metal is hovering around lows last seen in early 2010.
That in itself brings with it new dynamics and a newly-emerging story. To understand why, look no further than China.
Chinese imports of refined nickel have undergone a step-change since August. September's net imports of 17,400 tonnes were the highest monthly total of the year. They accelerated further to 21,600 tonnes in October, the highest monthly total since July 2009.
Two factors appear to be in play, both directly related to the current low-price environment. A nickel price below $20,000 appears to have piqued Chinese investor interest.
There are persistent rumours that a Chinese bank is planning a physical nickel exchange traded fund. It's not such a fanciful idea given the lack of an exchange traded contract in the country and nickel's track history as a favoured metallic investment play in China.
Remember those stories of Chinese pig farmers accumulating the stuff back in early 2009 when the nickel price was also bombed out?
At these levels the risk-reward ratio looks interesting, given the fact that this metal hit highs above $50,000 back in 2005. The downside, meanwhile, is now starting to look limited, particularly from a Chinese perspective.
The world's highest cost producers are liberally sprinkled through China's massive nickel pig iron (NPI) sector. Pinpointing the pain threshold is nigh impossible in what has become a sprawling industry using different types of technology with different cost profiles.
But the price is now low enough to have real impact on NPI run-rates and to encourage stainless producers to switch back to refined metal from NPI as a nickel input.
So, just as refined metal imports accelerated to multi-month highs in October, so did imports of nickel ore, used to make NPI, fall sharply from September's 6.3 million tonnes to 4.6 million tonnes.
This supply response is only going to get stronger the lower the price goes from these levels. And based on current import trends, so too will Chinese investment buying.
Which is why, along with surplus-laden aluminium, nickel's narrative is now evolving into "defensive play" as the metal market looks to cost-curve dynamics in a world sliding towards renewed manufacturing contraction.Oh, and one other thing.
Goro may be "100 percent" ready to go. But it's still got to go yet. So too have the other big projects now being readied for start-up.
Given the short but highly problematic history of HPAL technology, nothing with any of these projects should be taken for granted.
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