Singapore 09/05/2016 - While nickel price has risen six percent from mid-April’s low, the rally seems to be part of a general re-rating in commodities – brought on by a credit surge in China, US dollar weakness and oil price rise – rather than any kick in nickel and/or stainless steel demand or restocking, said Morgan Stanley in a report on Monday.
Nickel remains Morgan Stanley’s top pick among the commodities it reviews based on the view that “this is an oversold market, plus stainless mills have depleted their inventories and it is restocking season.” But it concedes that nickel’s weak performance “is a bit frustrating”.
Nickel is facing bearish fundamental conditions like price-insensitive supply growth, high exchange inventories and weak demand growth, it noted.
Despite a 40 percent price collapse last year, less than one percent of existing supply was cut from the market - the sticky supply situation could be explained by the top end of nickel’s cost curve having big assets owned by diversified producers prepared to wait for a price recovery, it said.
The London Metal Exchange and Shanghai Futures Exchange nickel inventories are around 500,000 tonnes in total, which is around 25 percent of nickel’s global annual supply or 14 weeks of consumption or four-to-five-times that of other base metals.
“So no one is worried about short-term nickel supply,” Morgan Stanley said.
Demand growth from the stainless sector remains weak. “Delivery of this high-value product requires confidence in the economic outlook but the mills appear unconvinced by the recent boost in china’s industrial activity given the still modest pick-up in stainless output in the first quarter,” it said.
Worldwide stainless steel producers are reporting some activity, prompting a small nickel and product inventory drawdown in Asia, the US and Europe. These conditions, together with a lack of scrap, appear sufficient to allow a floor to form in stainless steel prices since February 2016, it added.
Morgan Stanley forecasts a 2.4-percent increase in stainless steel production in 2016 - versus a 1.3-percent decline in 2015 - underpinned by China’s own nickel demand. It expects Chinese nickel demand to rise one percent and global nickel demand to increase 1.6 percent this year.
“Any nickel/stainless upside in 2016 requires China’s apparent industrial sector recovery to extend beyond infrastructure in more stainless steel-intensive sectors like vehicles, machinery appliances and industrial,” it said.
Morgan Stanley forecasts the nickel price at $4.70 per lb ($10,361 per tonne) in 2016, with the price at $5.10 per lb in the third quarter and $5.20 in the fourth quarter of this year. It sees the metal rising to $5.55 per lb in 2017 and $6.60 per lb in 2018.
The LME three-month nickel price was last at $8,795 per tonne on Monday, down $270 from Friday’s close.