The nickel price has rallied more than 20% since late February and significantly outperformed other base metals over this period.
The sharp price increase is mainly due to supply concerns which we expect to persist in coming months and send the price higher.
If the economic situation in China stabilises, it will be a source of further support for the nickel price
Since late February, we have experienced a strong rally in the nickel market. Over this period, the nickel price has surged more than 20%. Nickel has vastly outperformed other base metals; most notably the copper price has dropped more than 5% over the same period. With the USD18.000/MT price tag for nickel within reach, the question remains whether the rally will stop here or whether there is more fuel left in the nickel price.
Overall, we see an environment in coming months which may support a further increase in the nickel price. First of all, the nickel supply situation will continue to be a worry to the market. The tightening of global nickel ore supplies following the implementation of the Indonesian ban on exports of nickel ore in January has been the main catalyst behind the surge in prices. In recent years, Indonesia has become the world’s largest nickel ore producer and the ban has therefore taken a significant toll on total supplies in the market – around a third of the world’s nickel production takes place in Indonesia. Unless the Indonesian economy suffers a significant setback, the ban looks set to stay and the market will therefore have to do without Indonesia’s nickel until miners have invested in smelters which will allow them to export refined nickel.
The conflict between Ukraine and Russia has further added to supply worries. Russia is currently the world’s third largest producer as around 10% of the world’s nickel ore is produced in Russia. The worry has been that the conflict over Ukraine may lead to sanctions on Russia which would disrupt Russia’s nickel exports and thus further tighten global supplies. As the conflict has escalated further and no swift solution looks within reach, this is likely to continue to be a worry for the coming months.
Overall, we expect the global economic recovery to gain further strength in 2014 as both the US and European economic situation is improving which is supportive for the nickel price, but more importantly for global nickel demand Chinese politicians have begun to address the weakness in China’s economy. That could stabilise the economy of the world’s largest nickel consumer while GDP growth will remain close to the government’s 7.5% target. This should further remove some of the downside risk to base metal prices owing to the risk of a further slowdown in China and thus be supportive for prices.
The nickel forward curve is currently flat, which reflects that some of the factors which have pushed up the nickel price are likely to be temporary. With nickel stocks-to-use close to 15% currently, the supply situation on the nickel market is fundamentally sound, which weighs on prices further out the curve; as does the outlook for oil prices, which are likely to trend lower and weigh on nickel prices further out on the horizon.
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