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Stainless surge revives nickel market, but surplus still looms

Stainless surge revives nickel market, but surplus still looms

File photo of men transporting nickel laterite ore on a truck at Ganyu port in Lianyungang, Jiangsu province, China, Jun 11, 2019. (Photo: REUTERS/Stringer)

LONDON: Rapidly rising stainless steel production in top consumer China has helped to preserve demand and prices of key ingredient nickel, but analysts still expect a supply overhang of the metal valued for its anti-corrosive properties.

Benchmark nickel prices on the London Metal Exchange (LME) are near their highest in more than seven months at around US$14,300 a tonne and up more than 30 per cent since touching a 14-month low of US$10,865 in March.

COVID-19 lockdowns and stalled manufacturing activity had led analysts to expect a large drop in production of stainless steel, accounting for about 70 per cent of global nickel demand estimated at about 2.35 million tonnes this year.

But vast amounts of fiscal and monetary stimulus in China have fuelled a surge in economic activity, particularly in the infrastructure and construction industries, major consumers of stainless steel.

Macquarie analyst Jim Lennon estimates that Chinese mills produced 2.875 million tonnes of stainless steel in July, up 4.8 per cent year on year.

"More importantly for nickel, the high-nickel containing 300-series grades of stainless saw growth of 17.5 per cent year on year in July to 1.46 million tonnes, an all-time high," Lennon said.

"But we're still likely to see a surplus around 100,000 tonnes. Demand is better, but supply is better, too, mostly because of China and Indonesia."

Traders say much of nickel's gains are due to bets on higher prices, as can be seen in open interest for the LME's nickel contracts.

This is partly speculative and based on Tesla boss Elon Musk urging miners to produce more nickel "in an environmentally sensitive way".

Analysts say that most of the stainless steel produced is being consumed and that inventories in China are falling.

"The nickel market is probably where you get the starkest comparison between China and rest of the world in terms of economic growth and demand," said Citi analyst Oliver Nugent.

Citi expects the nickel market to be oversupplied by 135,000 tonnes this year and 117,000 tonnes in 2021.

"In the base metals complex, nickel looks the most expensive compared to production costs," Citi's Nugent said.

Source: Reuters/dv


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