London 24/05/2016 - Market participants are unconvinced by nickel's bull story while prices remain week despite a positive fundamental backdrop.
The recent rut - three-month nickel was last around a soft $8,400 per tonne, having slumped to a seven-week low this week at $8,330 - is despite a substantial uptick in Chinese imports, a decline in LME stocks and projections of a deficit.
"Nickel prices got punched in the face [on Monday] and the technicals are converging. No one wants to be a hero in this metal," Macquarie's Vivienne Lloyd told FastMarkets.
Indeed, despite bullish outlooks from several leading banks, many investors are cautious, having been burnt last year when it was hailed as the most favoured metal only for it to end as the year's worst performer.
"Demand continues to be very good and clearly there are not enough ferro-nickel imports around but it looks like the price-makers and funds still don't want to believe it," a nickel producer said.
A 270-percent jump in refined nickel and alloy imports into China in April should have been taken as a bullish signal. But the price headed lower, taking its cue from others such as copper.
"If copper tests lows then others will follow - they may be more resilient but they can't rally, even with improving fundamentals," Société Générale analyst Robin Bhar said.
Strong Chinese import data failed to lift the market because "base metals had already sold off when the lower copper imports were announced", the nickel producer added.
This has wrong-footed market participants particularly because the higher Chinese nickel imports reflect a recovery in the Asian stainless steel market.
"We know that full-plate cathodes have been flowing from LME warehouse to China against arbitrage trading but it seems more metal is also going directly from the producer to China," Triland noted. "If only some of the demand for nickel from these figures is for genuine consumption, the price could look very cheap here when we look back in a year or so."
Indeed, a lack of availability of full-plate cathode has also helped to underpin premiums in Shanghai's bonded warehouses. The premium increased to $150-190 per tonne from $120-160 last week, according to the most recent FastMarkets assessment.
Money manager net longs have taken advantage of the price weakness to increase their exposure, buying 5,718 lots last week, according to the LME commitment of trade report. The gross long position is now the highest it has been since the start of 2015.
"There is a danger that shorts re-enter the market more aggressively or the longs bail out. The market looks vulnerable but the longs look determined to ride out the sell-off," FastMarkets analyst William Adams said.
The closure of the LME on Monday for a bank holiday coupled with options expiry next week could lead to fireworks.
"All of a sudden the downside looks very vulnerable and an attack on the $8,000 level is not out of the question," Malcolm Freeman at Kingdom Futures noted.
Adding to the uncertainty is the lack of transparency about invisible nickel inventories - a substantial volume of material is believed to be held off-exchange.
"Estimates of how much refined inventories are sitting off-exchange in addition to those on the LME and SHFE vary from 700,000 to 1 million tonnes but it is not clear whether this includes nickel units contained in stainless steel scrap," Bhar said.
Still, invisible stocks of this magnitude would equate to a large 31.7-39.6 weeks of consumption.
On the SHFE, inventories increased 2,074 tonnes last week to 95,411 tonnes due to a favourable arbitrage and strong demand for the May and September delivery dates. But LME stocks have moved off all-time highs earlier this year - at 401,874 tonnes, they are at their lowest since December 10.
"More inventories need to be drawn down - there is still a lot of metal held off-warrant - but we are moving in the right direction," Bhar said.
Meanwhile, cancelled warrants have been volatile while warehouse games continue. In September, cancellations hit a record high of more than 200,000 tonnes, a move centred on Johor.
Metal was then shifted to Taiwan, attracted by warehouse incentives, and bounced between Taiwan and Malaysia in March when warehousers stepped up their efforts to get stocks. The bulk of this metal was briquettes, which are not accepted in SHFE sheds.
On Monday, although 11,136 tonnes were freshly cancelled in Kaohsiung, there was no impact on prices. Around 11,500 tonnes were subsequently put back on warrant, taking total cancellations to 125,730 tonnes. But cancellations no longer play a key role in price moves, traders said
"Traders pay less interest to stock moves as it is unlikely to be actual demand. Whereas in the past you would sit at your desk and wait for the LME stock data, nowadays it is disregarded as moves are usually due to warehouse games," one LME trader said.
Although uncertainty continues to dog the market, the latest data paints a more bullish picture - the market deficit in March widened to 8,200 tonnes because of Chinese demand, the International Nickel Study Group (INSG) said last week.
The group forecast a market deficit this year of 49,000 tonnes compared with a market surplus of 93,000 tonnes in 2015.
(Editing by Mark Shaw)