Singapore 24/05/2016 - A slowdown in stainless steel demand and a reversal in the earlier uptrend in Chinese stainless prices are weighing on Shanghai Futures Exchange (SHFE) nickel prices, market participants said.
After rising from early April, the most active SHFE nickel contract has reversed most of its gains, falling around 13 percent since early May. The SHFE September nickel contract closed at 67,020 yuan per tonne on Tuesday, down 160 yuan on Monday's close.
The gains in SHFE nickel in April were in part brought about by an improved stainless steel market. Chinese stainless production - especially for 300 series steels, which have high nickel content - staged a remarkable rebound from March after a very weak January and February, Macquarie Commodities Research said.
The recovery appears to be a combination of restocking, higher exports and better end-use, especially in construction and infrastructure following strong fiscal and monetary stimulus measures from the Chinese government, it noted in a report last week.
But market participants are now reporting a slowdown in nickel demand as the peak demand period of April-May comes to an end.
"Demand had picked up in April-May compared to last year but demand should start to slow during June-July given the summer lull," an official at a major state-owned stainless steelmaker told FastMarkets.
The steelmaker is producing at half of its capacity and will continue to do so while it remains cautious on the market's outlook because "macroeconomic conditions have not improved much", the official added.
Attendees at a nickel conference recently in London cast doubts on the sustainability of strong nickel demand from the Chinese stainless market given the widely held belief that credit has been the main driver.
Chinese domestic stainless cold-rolled steel coil prices have also started to ease since early May after rising throughout April, sources noted.
"The stock-up by stainless steel end-users and traders has basically been completed in May. And with stainless steel prices falling, users and traders are not really buying any more," Liu Yujing, a stainless steel analyst with Beijing Antaike, said.
"If stainless prices remain stable or fall going forward, users will choose to digest stocks accumulated earlier and refrain from fresh purchases in the market," she said.
Those end-users and traders that were low on inventory had built up stainless steel stocks during March-April for fear that stainless prices could rise further, she noted.
NICKEL STOCKS STILL HUGE
Other than expected slower demand from stainless users, huge global nickel stocks are also likely to continue to cap SHFE and LME nickel prices in the near term.
Capacity closures to date seem to be enough to shift the market into a small deficit this year but they have done little to offest the 460,000-tonne surplus of refined metal that built up between 2012 and 2015, ICBC Standard Bank said in a report last week.
LME inventories alone - of 402,504 tonnes as at Tuesday - are able to support a complete shutdown in global nickel production for nearly three months, it noted.
"Lacklustre fundamentals and a very large stock overhang nevertheless suggest that the metal has a long way to go before sustained fundamental support kicks in," it said.
"Price spikes will likely be short lived but will also tempt [producers] to keep on going longer than they should," it added. "As such, nickel looks set for another volatile but ultimately range-bound year with the painful rebalancing needed by the market still not having taken place."
ICBC SB forecasts growth of 1.3 percent in global stainless steel production this year, an improvement from the negligible 0.1-percent growth estimated in 2015 but "hardly the foundation of an exciting outlook for nickel demand", it said.
LME three-month nickel was last at $8,375 per tonne on Tuesday, up $45 on Monday's close.
(Editing by Mark Shaw)