London 13/05/2016 - Speakers at Metal Bulletin's nickel conference here this week were divided on whether the surprisingly strong demand for nickel from China's stainless steel sector in the first quarter of the year is sustainable.
Chinese stainless production increased to 5.3 million tonnes in the first quarter, according to Citi.
To feed its growing stainless steel industry, Chinese imports of ferronickel rose 11 percent year-on-year in the first quarter and the imports of refined nickel jumped 350 percent, Barry Jackson, market intelligence manager for nickel at Anglo American, said on Wednesday.
"The actual performance of China stainless steel production in the first quarter is much better than expectations, especially the 300 series production, which went up strongly," he added.
Chinese stainless output rose 6.5 percent year-on-year in the first quarter, David Wilson, director of metals research and strategy of Citi, told delegates.
But most market participants doubt whether demand from world's biggest nickel-consuming country will last given the widely held belief that credit has been the main driver of the improvement rather than genuine end-user consumption.
"Massive surging credits in China helped stainless steel [profit] margins pick up so stainless steel producers increased the production… I don't think that's amazingly long-term positive," Wilson said.
Credit availability surged in the first quarter in China, with $1 trillion injected into its economy between January and March, prompting a pick-up in fixed asset investment and general manufacturing activity, he added.
"There's no doubt that a massive of money flowed into the ferrous sector contracts this year - that has driven a broader support for steel prices… so on the whole the pick-up in [stainless steel production] is led by price rather than a genuine significant improvement in end-demand conditions in China," Macquarie senior commodities consultant Jim Lennon said.
With Chinese apparent stainless demand of 3.9 million tonnes in the first quarter, according to Citi Research, leaving a gap of 1.4 million tonnes between output and consumption, a considerable volume of Chinese output has been shipped to other countries rather than consumed domestically, market participants warn.
The surge in speculative activity has not been matched by underlying demand in China, David said.
"We don't think Asian stainless market's capacity to absorb this ramp-up in stainless exports is sustainable… I think that's been a driver of the improvement in the stainless section in China but it's not going to be persistent," Lennon noted.
But uncertainty over Chinese monetary policy continues to cloud the outlook and makes accurate predictions about future market direction difficult, market observers said.
"China doesn't want to crash their economy… and they have their financial means to stimulate their economy when they need to," Jackson pointed out.
"There is a clear uncertainty regards to credit supply policy and that does create some outside risks to China's nickel market," Lennon said.
(Editing by Mark Shaw)