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Barron's Online: Nickel’s Sinking Feeling

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https://online.barrons.com/articles/nickel-prices-have-plunged-and-may-fall-even-more-1434761230

Nickel’s Sinking Feeling

Nickel’s price has plunged, but it could have even further to fall amid less Chinese demand and market oversupply.

By Ira Iosebashvili

Updated June 20, 2015 12:18 a.m. ET

Nickel prices are brushing against their lowest level in six years, but they could have even further to fall.

There are many reasons to avoid nickel: Markets are flooded with the metal, and there isn’t a lot of demand, analysts say. Purchases by China, a major user of the key ingredient in the manufacturing of stainless steel, have dwindled since last year, when authorities cracked down on nickel’s use as collateral in shady financing schemes.

At the same time, many investors who were lured into nickel during the metal’s rally in the first half of 2014 and who didn’t get out fast enough when the slide began are lightening their positions every time the metal rallies, keeping a ceiling on the price. “The situation for nickel isn’t looking very exciting, at least in the short term,” says Citigroup analyst David Wilson.

IT WASN’T SUPPOSED TO BE THIS WAY. Prices shot up about 50% from January to mid-May in 2014 as a ban on exports of the metal by Indonesia led some investors to believe global nickel stockpiles were in danger of being depleted. Indonesia was previously the world’s No.1 nickel exporter.

What investors didn’t count on was the Philippines, a major nickel producer in its own right, ramping up output to fill the hole. The anticipated shortfall never came, and the market ended the year with a surplus of about 125,000 metric tons, according to the International Nickel Study Group. Prices finished the year down nearly 30% from the peak of $21,260 a metric ton hit in May.

Some analysts, at firms such as Morgan Stanley and Citigroup, expect nickel prices to regain their footing and trade higher by the end of 2015. However, prices have continued their slide, with nickel for delivery in three months on the London Metal Exchange recently trading at $12,710 a ton, down 16% for the year.

“Nickel’s weak price performance in 2015 reflects the oversupplied state of this metal market,” Morgan Stanley analysts said in a recent note to clients.

In better days, much of that nickel would have ended up in China. But demand from the world’s largest consumer of raw materials has waned amid tighter regulations on the use of metals in financing operations. Chinese commodities traders took out hundreds of millions of dollars in loans through the past several years, using metals and other commodities as collateral. In some cases, the traders illegally pledged the same stockpiles for multiple loans, sparking a government probe.

China is also buying less nickel as its economy slows. China’s central bank recently lowered its forecast for full-year economic growth to 7% from 7.1%, which was already less than 2014’s 7.4% rise in gross domestic product.

Nickel may also be a victim of its own success. Many investors who were eager to get their hands on nickel futures when the price was soaring last year held onto their bets when the market turned. Now, they are likely to sell nickel at the first sign of a rally, happy to exit the position with a smaller-than-expected loss, says Colin Hamilton, head of commodities research at Macquarie.

“So many commodity hedge funds have been hurt by nickel, that it’s effectively killed off investor interest,” Mr. Hamilton says. “It’s really hard to bang the table for nickel right now.”