“Nickel is pricing in a looming supply glut as Indonesia builds out ever more production capacity in its race to be an electric vehicle battery metals giant.
The country's mined output grew by 48% last year and by another 41% in the first three months of this year, according to The International Nickel Study Group.
Indeed, such is the scale of the Indonesian nickel boom that the market could be in large surplus until at least 2027, Macquarie Bank analyst Jim Lennon told an industry conference in Jakarta last week.
You wouldn't know it from LME stocks, which are at their lowest since 2007 with metal still departing daily.
The supply surge hasn't yet crossed nickel's class divide and low visible inventory is still cushioning the price fall.
LOW EXCHANGE STOCKS, DIVERGENT SPREADS
Another 144 tonnes of nickel were loaded out of the LME warehouse system on Tuesday, their place in the exit line taken by 132 tonnes of fresh cancellations.
LME stocks have fallen by 32% since the start of this year and currently sit at a 16-year low of 37,386 tonnes. On-warrant inventory of 34,746 tonnes is the lowest it's been since November 2019.
Shanghai Futures Exchange (SHFE) stocks dwindled to just 560 tonnes earlier this month before getting a 3,678-tonne mini-booster last week. Shanghai time-spreads have been persistently tight due to chronically low stocks and the cash premium seems finally to be drawing in metal.
London time-spreads, by contrast, are trading in super-contango territory. The benchmark cash-to-three-months period <CMNI0-3> flexed out to a contango of $210 per tonne in late May and was still a wide $122 at Tuesday's close.
The spread structure complements the outright price weakness in signalling growing oversupply.
Low exchange inventory, however, signals that the surplus is still largely confined to the Class II segment of the market and hasn't yet crossed over to the high-purity Class I nickel that trades on both the LME and ShFE.
CLOSING THE CLASS DIVIDE
The INSG last month raised its expected global supply-demand surplus to 239,000 tonnes. But it noted that while market surpluses have in the past been linked to LME-deliverable Class I nickel, this year's abundance will be in Class II intermediate product and chemical forms.
Russian nickel producer Norilsk Nickel has also just raised its assessment of 2023 market surplus from 110,000 tonnes to over 200,000 tonnes in light of the pace of Indonesian production growth. It too expects most of the surplus to come in Class II form.
Nickel's class divide is expected to close as a new generation of Indonesian operators master the processing route of converting the country's relatively low-grade ore to battery-ready nickel sulphate.
Upgrading Indonesian supply to battery-quality form should reduce demand for Class I nickel, previously the material of choice for conversion to nickel sulphate.
There are signs of this already happening.
China, which is heavily invested in Indonesia's nickel sector, has been importing ever rising quantities of intermediate products such as nickel matte and pig iron.
The country's call on Class I refined metal has been falling in tandem. Net refined metal imports slumped from 256,000 tonnes in 2021 to 133,000 tonnes last year. Inbound shipments in the first four months of 2023 amounted to just 11,000 tonnes, down 82% on the same period of 2022.
The displacement effect should help loosen a tight Class I market outside of China.
Norilsk expects the Indonesian displacement effect to generate a 40,000-tonne supply surplus in the Western market over the course of the year.
WAITING FOR SURPLUS
The Class I physical supply chain is easing. Nickel briquettes in Rotterdam are currently commanding a premium over LME cash in the range of $375-600 per tonne, according to Fastmarkets.
That's a long way off last year's extreme highs of over $2,000 per tonne when the market was panicking about the potential for official sanctions on Norilsk, a major supplier of Class I nickel.
However, the European premium is still elevated by historical standards. Prior to February 2022 and the Russian invasion of Ukraine it had been trading for many months just below $200 per tonne.
Russian nickel has been hit with penal import tariffs by the United States but remains free of government sanctions. Self-sanctioning by buyers opting for other brand metal clouds the picture but the flow of Russian metal, even if down changed channels, has been an important supply stabiliser in Western markets.
Yet it is evident that refined metal is still sufficiently scarce that material is still tightly held. The last inflows to the LME warehouse network were almost a month ago.
More arrivals would vindicate the many bears in the market. Until then, though, low and falling inventory remains a point of tension within a market pricing itself for massive surplus.”
The opinions expressed here are those of the author, a columnist for Reuters.