Among base metals nickel was a laggard for most parts of 2016, given the large overhang of industry stocks — larger than any other base metal — including the so-called invisible stocks that are held off-market.

Despite this, the world nickel market slipped for the first time in five years into a deficit last year following a second successive annual contraction in supply and a boost in demand in the wake of surge in Chinese stainless steel production.

Nickel, a silvery white metal, is an ingredient for stainless steel and there is positive correlation between stainless steel production and nickel consumption. According to the International Nickel Study Group, usage of the metal will continue to expand in 2017 due to higher production of stainless steel despite a challenging global economic environment.

On the supply side, there have been some cutbacks by traditional nickel producers but the volume has not been enough to make a significant dent in the overhang of stocks. Additionally, there have been some capacity ramp-ups, especially outside of Indonesia.

As a result, while inventories are still large, global reported inventories are slowly being drawn down and the market is most likely to stay in deficit till 2019, despite the possibility of a ramp-up in availability.

From a fundamental perspective, on current reckoning, there does not seem to be too much upside for nickel prices. Notwithstanding this, it is well-recognised that nickel is a volatile and often fast-moving market with many major unknowns that could potentially shift the market to a new trajectory.

Policy uncertainty

The main uncertainty relates to outcome of mining/mineral export policy reviews in Indonesia and the Philippines, two major ore exporters. Forecasting supply outlook is surely fraught with difficulties. Until recently, both governments were expected to take a tough stand and, in the event, the case for a bull run in nickel prices was strengthening. However, right now, conditions are more hazy than clear.

While there has been a mining crackdown in the Philippines with several mines closing down, the latest news from Indonesia is more positive for supplies. Indonesia is likely to ease the ban on nickel ore exports imposed way back in January 2014. Market participants believe that Indonesian mines may export over five million tonnes of nickel ore under the country’s new rules. Investors are watching this space.

In the event of nickel prices starting to climb because of ore shortages, it will give a boost to NPI (nickel pig iron, a low grade ferro-nickel) production, especially in Indonesia and even in the Philippines where the turnaround time is said to be short. Higher prices will also accelerate restart of capacity elsewhere currently standing idle.

Given this scenario, experts assert that it is hard to get away from an outlook clouded by ample supply one way or another. On balance, global nickel supply deficit may continue for the next couple of years. So, in some sense, the nickel market is on a long road to recovery.

According to an industry expert, the nickel market and its outlook has been hostage to politics in Indonesia and the Philippines over the past 2-3 years, and in particular how decisions made in Jakarta and Manila have affected ore supply to China’s NPI industry.

In 2013 and 2014, China produced approximately 470,000 tonnes of nickel contained in NPI which declined to about 385,000 tonnes in 2015 and further down to 350,000 tonnes in 2016. The slip is likely to continue into the next two years. The Chinese NPI capacity is contracting gradually as economics, more stringent pollution controls, relocation to Indonesia and ore grade availability issues take their toll.

Considering market fundamentals, including supply uncertainties and emerging demand, on current reckoning, it would be reasonable to assume that annual LME cash prices may average $10,600 a tonne in 2017, going up to $11,000/t in 2018.

The author is an agri commodity market specialist

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