Why Ukraine Crisis Could Drive Nickel To $25,000/Tonne

May 5 2014, 11:42am CDT | by

Nickel has enjoyed a solid price spurt in recent months, fuelled by fears over heavy supply disruptions after Indonesia — home to around a fifth of total nickel production — placed an export ban on nickel ore back in January.

The move was prompted by a 2009 law calling for more domestic refined output, a situation which is significantly hampering Chinese production of nickel pig iron (NPI) as ore shipments dry up.  As Indonesian refining capacity could be described as inadequate at best, nickel prices have shot 35% higher since the turn of the year, striking 14-month peaks above $18,700 per tonne in the process and looking poised for another move skywards.

Meanwhile, the evolving political situation in Ukraine is also adding pressure to the nickel market, and analysts reckon that a backdrop of escalating trade restrictions on Moscow from the West could add fresh ammunition for the metal to surge still higher.

Market balance under the microscope

Indeed, Bank of America-Merrill Lynch upped its price forecasts in recent weeks in anticipation of lingering output issues worldwide, and fully expects the metal to strike $25,000 within the next 12 months.

The institution reckons that issues in Indonesia are set to push the nickel market into deficit next year, while the possibility of curbs on Russian shipments could drive stocks to critically low levels in coming months. “Possible sanctions on Russia, which supplies 12% of global nickel production, have recently accelerated price increases,” the bank notes.

Over the coming days, we would follow developments around Ukraine closely [as] any sanctions which may limit nickel shipments would in all likelihood add to the rally,” it adds.

Russia’s Norilsk Nickel is the single-largest producer of the metal, and group production of 285,000 tonnes last year accounted for more than 15% of the global total. Along with energy giant Gazprom, the mining giant has been targeted at one of the more likely recipients of strict economic sanctions.

Bank of America-Merrill Lynch says that it expects nickel to average $16,091 per tonne in 2014, up from $15,034 last year, before marching on to $17,839 and $18,000 in 2015 and 2016 respectively. But as long as the sales ban in Indonesia persists, and intensifying military action in Eastern Europe intensifies trade curbs on Russia, nickel prices could easily surge past these readings.

Demand on the rise

Meanwhile, an environment of solidly-recovering nickel demand, helped by improving financial conditions in Europe and a continued uptick in the US economy, is expected to exacerbate tightness in the metal’s market balance.

In particular, booming production from stainless steel mills — the sector is responsible for around two-thirds of global nickel off-take — is expected to result in fresh output records this year. Indeed, metals consultancy MEPS expects total crude stainless steel output to hit a new record of 39.5 million tonnes in 2014, up 3.6% from last year’s all-time high of 38.1 million tonnes.

Sucden Financial agrees that robust organic growth should provide a boon to stainless steel demand, with consumption rising faster than the majority of the base metals. This situation “… should carry nickel demand up with it,” the broker argues, while “significantly more interest from consumers to restock is likely this year ahead of next year’s move into a significant deficit.”

For the time being nickel stock levels remain at healthy levels. London Metal Exchange inventories have steadily moved higher since 2011, and although outflows have stepped up in recent weeks levels still stand close to a record 290,000 tonnes. Meanwhile China has been stockpiling vast amounts of ore over many months in anticipation of Indonesia’s export ban.

But as sales restrictions from South-East Asia look set to linger, and the political situation in Ukraine looks set to get a whole lot worse, nickel prices — helped by a steadily-improving demand picture — could be set for further price appreciation in the near future.


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