On the last day of May, LME three-month nickel prices crashed through the US$9,000/t mark and have since failed to recover above that level. By mid-June, nickel was trading near US$8,700/t, its lowest level for 12 months. Indeed, it now appears that the US$9,000/t level, which had been a steady level of support for three-month prices, is now a challenging line of resistance.
In the recently published "Nickel Commodity Briefing Service," we have maintained our price forecast for this year at an average of US$9,785/t. This forecast implies that prices will fail to recover strongly from current levels over the remainder of the year, as an abundance of mine supply, ferronickel from Indonesia and ample exchange stocks collude to cap any meaningful price improvement. We forecast LME three-month prices to average US$9,527/t in the third quarter and US$9,859/t in the fourth quarter.
Sentiment has moved noticeably from the start of the year, when market-watchers were questioning when nickel would gather enough momentum to break through the US$11,000/t ceiling. This is largely due to a significant shift in fundamentals. The supply side has increasingly looked much looser, with a likely abundance of Philippine and Indonesian ore available to Chinese nickel pig iron producers over the months ahead. This combines with a potentially lower-than-anticipated rate of growth in stainless steel production, as we expect the Chinese government to remain wary of maintaining a large-scale provision of credit and economic stimulus.
Given the price decline, we assess the balance of risk to our price forecast to be weighted to the upside. At such weak prices, increasing numbers of nickel operations are battling to remain profitable. Should a sufficient number of the smaller players, or just one or two of the larger operations, decide to shutter production, a tighter supply picture may emerge. This could improve fundamentals but, more importantly for the short-term, improve sentiment and help lift nickel prices out of the doldrums.
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