Early this year, Stratton Metals Ltd., a major nickel dealer in London, pulled about 4,000 tons of the metal from warehouses to feed demand from its steelmaker customers.
It was a fraction of the roughly 160,000 tons of the metal lying around in exchange warehouses. But Stratton?s orders helped trigger a classic price squeeze that pushed nickel up 34% within weeks?a surge that caught analysts, traders and companies flat-footed. The sudden move quickly rippled through to users of the metal?namely, the world?s stainless-steel makers?which ratcheted up their prices.
The result was ?a short-term scramble? in the nickel market, says Jim Lennon, a commodities strategist with Macquarie Group.
The sharp rise in nickel prices demonstrates how even a slight change in demand and supply can roil tiny commodities markets like those for nickel, orange juice and cocoa. Nickel is roughly a $13 billion market, while the crude-oil market is $280 billion, based on the open interest on major exchanges.
Traders interpreted the drawdown as a sign of rising demand that, in turn, sparked worries that supplies might suddenly get tight. A chunk of the warehoused metal was tied up by banks like Deutsche Bank AG and Barclays PLC, which had pledged to deliver it to customers at a later date, according to people familiar with the matter.
Overall, nickel demand rose 5.5% world-wide in January, according to the International Nickel Study Group in Lisbon.
Yet, between Feb. 1 and Feb. 12, the volume of nickel requested from warehouses nearly quintupled, according to data at the London Metal Exchange, the main trading venue for nickel.
Industrial buyers moved to lock in prices before they climbed further, and traders, who had bet that the slow economy would tamp down demand, reversed course.
?Only last week, we were calling for a top in nickel,? Jordan Kotick, head of technical strategy at Barclays Capital, wrote in a March 2 research note. ?However, events since have proved us wrong, and today we are changing our view.?
Example of how a metals market with a lot of paper obligations can turn on a change in perception about what amount of actual physical will be available when at what price.
