London 04/07/2016 - LME nickel surged to its highest in more than eight months above $10,400 on Monday after a break above $10,000 provided a springboard for further increases.
The metal was last at $10,410 per tonne, up 4.4 percent on Friday's close and nearly 40 percent higher than the 2016 low of $7,550 hit in February
Market participants attributed the turnaround to a mixture of short covering and fund activity coupled with environmental warnings from the Philippines.
Philippine president-elect Rodrigo Duterte took office on June 30 and promised a "comprehensive review" of mining concessions. Indeed, one of the first moves as president was to instate Regina Lopex - a known environment lobbyer - as the head of the country's department of environmental and natural resources.
Comments from Lopex that not even a third of mining companies are currently meeting environmental standards sent shorts running for cover.
"All the country's mines will be subjected to an investigation, which is bound to seriously paralyse mining activity," Commerzbank said in a research note.
"China will presumably continue to increase its already record-high imports of refined nickel - which in the first five months of this year rose nearly three-fold year-on-year to 193,000 tonnes. This is likely to lend longer-term support to the nickel price," it added.
According to the World Bureau of Metal Statistics, the Philippines is the world's largest nickel ore producer and China's main supplier. Before Indonesia instituted a ban on the export of untreated ores, it had been responsible for less than half of China's nickel ore imports.
"The Philippines took over a lot of production from Indonesia - so take that out the equation and you start to get a very different picture. Technically, [nickel] is looking overbought and may have a bit of work to do but we could push higher still," a trader said.
Traders highlighted as a key chart level $10,450 - a move above here would break a "monstrous" buy line, one said.
"It could get mucky - we are already seeing some scale-up trade selling and the shorts who sold in May and went away are now being punished," a broker said.
As well, physical traders are taking advantage of the price increase and are scrambling to trade at the current prices, which would be locked in throughout the typically quiet summer months
Adding to the potential for volatility is the approaching expiry date for July options this week - a push higher today or tomorrow could result in a lively Tuesday session, one options trader said.
"There has been a lot of option activity in nickel that could fuel this current move up to the $10,500 level, at which point the market would look very overextended," Malcolm Freeman at Kingdom Futures said.
"What we are seeing is a technical-driven market. If it can break and close in the next couple of days over the $10,450 level, then it finds a huge upside gap and technical /fund buyers will all rush in and fill up to the old support area at $13,500," he added.
This comes against a backdrop of falling LME inventories: stocks at 378,114 tonnes are at a fresh low since October 2014.
A dominant warrant holder is also in play, holding 30-39 percent across all three reported positions.
LME forward bandings data showed there is one short in the July at 30-39 percent and two at 5-9 percent. In August there is one short at 30-39 percent and one at 5-9 percent and in September one at 20-29 percent, another at 10-19 percent and four at 5-9 percent.
Spreads could see some activity although the benchmark cash/threes was last at a comfortable contango of $45. Cash/July, however, was at a small $7 contango and the sensitive 'Tom'/Next was at $0.48.
"Should the lending capacity of the market become restricted, pressure from borrowing could result in tighter nearby spreads," FastMarkets analyst Boris Mikanikrezai said.
(Editing by Mark Shaw)