Singapore 07/07/2016 - Rhetoric from the Philippines government on mining may have sent nickel prices to multi-month highs but improved fundamentals - via more production cuts, better demand and/or a decline in stocks – are needed to sustain and even extend those highs, market participants said.
New Philippine president Rodrigo Duterte, who took office on June 30, promised a "comprehensive review" of domestic mining concessions. His appointment of Regina Lopez - a known environmentalist - as head of the country's department of environmental and natural resources late last month sent Philippine mining stocks falling.
Lopez' recently announced plan to review mining operations in the country for a month sent nickel prices higher on concerns ore exports from the Philippines could be disrupted.
"[But] while any mine ban or reforms in the country could have serious implications for mine production - given that it accounts for around 20 percent of global production - we are somewhat reluctant to read too much into this yet," FastMarkets research analyst James Moore said.
"As well, given that visible LME/SHFE exchange stocks amount to almost 13 weeks of consumption, these will provide a comfortable cushion," he added.
The still huge nickel stockpile is the reason most often cited by industry watchers why nickel prices will find it hard to continue higher.
"Any fall in supply flows will be drawn down easily from stocks," a Singapore-based metals analyst with a major Asian bank told FastMarkets.
When non-exchange stocks are taken into consideration, there are almost one million tonnes of nickel, equivalent to 24-26 weeks of consumption, he estimated.
"I don’t think the rally will last, even assuming a 60,000-90,000-tonne market deficit by December," he said. "[But] if Brazil and China can ramp down production a bit more and if China’s 300-series [stainless steel] production shows positive moves, then I think $11,000 is possible."
The LME three-month nickel price hit $10,410 on Monday - its highest in more than eight months and up nearly 40 percent than the 2016 low of $7,550 hit in February. It has since retraced to $9,845 on Thursday, down $140 from Wednesday’s close.
The International Nickel Study Group sees the refined nickel market in only a slight deficit of 7,100 tonnes in the first four months of the year.
"So the complex needs to do much more if it is to whittle down the huge stock overhang - now estimated at about 35 percent of world consumption," Edward Meir of INTL FCStone said in a report this week.
Whether nickel prices on the Shanghai Futures Exchange can track higher will depend on the rate of exports from the Philippines in the coming months, an analyst at a Guangzhou-based hedge fund said.
"If China is unable to stockpile sufficient ore before the rainy season in the Philippines, Chinese nickel pig iron production will be affected… Then SHFE nickel at above 90,000 yuan per tonne would be possible," he said.
China will need to stockpile around five million tonnes of nickel ore in the next few months to mitigate the slowdown in Philippine exports during the monsoon season, he estimated.
Nickel ore shipments from the Philippines typically slow from late in the year till March the following year while heavy rains in parts of the country affect mining and logistics.
The SHFE September nickel contract climbed to an 11-month high of 83,420 yuan on Monday. It closed 790 yuan lower at 77,270 yuan on Thursday.
NEAR-TERM SUPPORT
Even if nickel prices do not trek higher, they are likely to remain supported in the near term, sources said.
"If SHFE nickel does not fall below 70,000 yuan, then there is a low chance of prices heading south," the Guangzhou analyst said.
Other than the Philippine mining uncertainty, the low level of Chinese nickel ore port stocks - estimated at 13 million tonnes - is providing support for SHFE prices, he added.
Nickel supply in China is contracting, Minmetals Jingyi Futures said on Wednesday. It noted that China's NPI output continued to decline in June while the country’s largest nickel producer, Jinchuan, is still cutting production.
Chinese NPI production fell 3.4 percent month-on-month to 33,990 tonnes (nickel contained) in June, according to Shanghai Metals Market.
While still at a rather high 380,000 tonnes, LME nickel stocks are at least moving in the right direction - they have fallen around 70,000 tonnes since March, noted Meir, forecasting nickel to trade between $9,700 and $11,000 this month.
Further production cuts and closures in the industry may be looming while the nickel price is still below the 50th percentile of the cost curve, Morgan Stanley said in a report this week.
Asian Mineral Resources is reviewing its 7,000-tonnes-per-year Ban Phuc mine in Vietnam, Finland's Talvivaara faces closure while several large assets in New Caledonia and Western Australia remain vulnerable, the broker noted.
"Stainless steel producers' reluctance to restock in the first half should see the [nickel] industry's high-cost laterite miners scale back production or close, rebalancing the trade before 2017's restocking season," it added.
For now, nickel demand remains good and availability tight amid a shortage of nickel iron units such as ferro-nickel, NPI and scrap, a western nickel producer source added.
"We have seen European stainless steel mills use cathodes, which has not happened for a very long time," he said. "So I think prices should be supported based on that. If we see more mine stoppages in the Philippines, then prices will certainly go higher."
(Additional reporting by Kathleen Retourne, editing by Mark Shaw)