London 11/05/2016 - Growing Chinese speculative activity has distorted the true price of metals, including that of nickel, market participants said on Wednesday.
In a volatile year to date, nickel slumped below $8,000 to fresh 2003 lows in February before rallying above $9,500 in April. The metal closed at $8,870 per tonne on the LME today, up $175 on Tuesday's close.
"While it is always nice to see higher prices, it needs to be for the right reasons. Otherwise it's simply not sustainable," a nickel trader said.
While increased demand from the stainless steel sector boosted the metal last month, market participants countered that much of the increase was the result of speculation in China and therefore lacked solid foundations.
"When you hear reports that retail traders are getting involved in commodities, you can't help but be unsettled," a producer source said. "Before it was the Chinese funds shorting the market and now you have the retail guys playing around."
Retail traders in China have been blamed for the aggressive moves in commodity prices , particularly iron ore and rebar although other metals have risen in association.
But until the price increase is fundamentally driven, traders will remain cautious - even if analysts continue to favour nickel.
"People have heard it all before. Most are now reluctant to jump on board so quickly, " the mining source said.
"April was a good start to the second quarter, which was a pleasant surprise, but May has been bumpy. We really want to see if we can hold at these levels before we get too confident," he added.
The general consensus is that a deficit will emerge in the second half of the year but a lot of its impact on the price will depend on exchange stock levels.
Nickel held in LME-listed warehouses climbed to a record high this year and, while there have been some drawdowns, they remain high at 414,024 tonnes.
But much of this material is not available, participants said - metal owners are taking advantage of the contango spread structure to lock stocks up in financing deals.
"As much as 50 percent of all LME stocks are tied up in finance deals, which will not easily be broken," an analyst said.
As well, cancelled warrants have started to increase - they were last as 133,542 tonnes after increases in Asia, lowering warrant availability further still.
Add a dominant holder in all three reported positions in the 30-39 percent bracket to the mix and there is potential for tightness, market participants said.
(Editing by Mark Shaw)