DBU PFS, page-26

Nickel prices will likely run through $US20K ‘in the near term’

Market Ructions

Gold finished a volatile week closing at US$1,812/ounce (figure 1) with physical bullion ETFs still showing net redemptions, at a pace north of ~1t/day in July with net positioning on COMEX futures/options appearing historically weak at sub-100k contracts (figure 1), well below normal net length of ~125k lots.

Gold prices have also underperformed in US$ terms versus the broader G10 FX basket by some 2.5pp since early June.

A recent sharp fall in real yields in my view should be bullish for gold in the short term.

FIGURE 1: COMEX gold, net length ‘000 contracts (Source: Citi Research, Commodity Flows, 12/7/21).

Palladium also saw modest inflows recovering from its recent sell-off with the percentage of commercial longs for palladium picking up to 33% from 26% in the last week of June, as consumers took advantage of the sub-$2,500/oz palladium prices following the unwind.

The palladium thematic still looks strong on the back of a global auto recovery as chip shortages ease over the next 6 months or so.

Prices, according to Citi (Citi Research, 12 July 2021) are anticipated to breach US$3,000/oz over the coming months.

This should be further buoyed as Chinese auto producers restock ahead of a projected market uptick over Sep-Oct. Palladium ETFs saw (Figure 3) modest holdings growth to 555koz as of July 8^th, while Pt investor demand remained weak (figure 2).

FIGURE 2: CFTC managed money positioning in Pt has fallen sharply as money flow out of precious metals. FIGURE 3: Pd net spec positioning is rising relative to Pt and Pd/Pt ratio should stay high.

Nickel (figure 4) has continued to perform strongly finishing the week at around US$8.60/lb with tighter LME spreads pointing to emerging physical tightness, diminishing LME stockpiles (figure 5).

US$20K per tonne looking likely in the near term.

Nickel is likely to be a significant beneficiary due to EV battery re-stocking and is generally stronger anyway in Q3 as Chinese stainless comes on top of already elevated levels of output and end demand.

As I indicated last week, supply disruptions in New Caledonia and Indonesian supply concerns (on the back of surging Covid-19 cases and possible NPI restrictions) together with Russian export taxes are likely to put significant upward pressure on nickel prices.

FIGURE 4: 1 year spot nickel (Source: www.*****metals.com, 16 July 2021).FIGURE 5: 1 year LME Nickel Warehouse Stocks Level (Source: www.*****metals.com, 16 July 2021).