COLUMN-Knives out for nickel despite bullish supply signals: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, June 24 (Reuters) - The knives are out for nickel.

Analysts at some of the biggest commodity banks have been slashing their price forecasts for the stainless steel input over the last few days amid a welter of negative comment.

"We now see little prospect of a sustainable nickel price or stainless stocking upturn ahead of the July/August holiday period," Citi said.

"Fundamentals of this small, high-value metal market are subdued for now: global inventories are high/rising (+25 percent of global supply); regional premia are soft; stainless steel prices are in decline," Morgan Stanley (Xetra: 885836 - news) chimed in.

JPMorgan (LSE: JPIU.L - news) is "more comfortable with $10,000 nickel" than it is with prices at $17,000 a tonne.

Ouch!

In part, this collective price downgrade is a simple reflection of nickel's underperformance so far this year. At a current $12,900 per tonne, three-month metal on the London Metal Exchange (LME) is down 13 percent since the start of January.

But it is also symptomatic of a reassessment of the bullish supply story that has been bubbling away in the nickel market since Indonesia banned nickel ore exports at the start of 2014, at a stroke cutting the raw materials supply line to China's massive nickel pig iron sector.

Ironically, there is accumulating evidence of supply-side tensions in the form of falling LME stocks and increased appetite for nickel units from China.

Neither, however, is sufficiently clear-cut a signal to assuage analyst fears about a deteriorating demand side of the equation.

LME STOCKS DOWN...

It was the relentless rise in LME nickel stocks (MNISTX-TOTAL (Swiss: FP.SW - news) ) that killed off nickel's premature rally last year.

And it has been the continued accumulation of metal in LME warehouses that has damped any bullish exuberance this year.

But that inexorable uptrend seems to have lost momentum, for now at least, with headline stocks peaking at 470,376 tonnes early this month and since retreating to a current 459,438 tonnes.

The amount of metal earmarked for physical delivery in the LME's cancelled-tonnage category, meanwhile, has risen to over 31 percent.

All grist to the bullish mill, you might think. Particularly since LME stock levels have been hard-wired into funds' positioning in nickel, according to David Wilson, analyst at Citi.

"We believe that CTAs (commodity trading advisors) have incorporated inventory level thresholds into their models driving the short-selling trends seen during much of the first quarter of this year." ("Nickel - Summer doldrums", June 23, 2015.)

The bigger hedge funds, Citi adds, "are now prepared to wait to see sustained LME inventories draw to confirm positive underlying market trends before re-entering the market".

The problem, as ever with LME stocks, arises from separating noise from signal.

Some of that noise emanates from stocks financiers, who have been attracted to nickel by what is still a generous contango structure across the front part of the LME curve .

Confusing the picture further is the accumulation of physical units for delivery against the new nickel contract on the Shanghai Futures Exchange (ShFE).

With only Chinese producers so far listed as deliverable brands, there has been heightened concern about the potential for a short squeeze on the ShFE contract in July.

The exchange has been talking with Russian producer Norilsk Nickel about including its metal as an ShFE-deliverable brand, although so far without any confirmation.

The net result of this uncertainty has been a clear-out of Chinese brands from the LME system and a play on Russian material by physical players hoping to capitalise on an extension of the ShFE's delivery criteria.

Both may be at work in the current LME stocks dynamic.

******************************************************* Graphic on China's nickel imports: http://link.reuters.com/cam94w *******************************************************

...CHINESE IMPORTS UP

And possibly also in China's increased appetite for refined nickel.

Net imports of refined nickel were 17,225 tonnes in May, the highest monthly level since January 2013.

Cumulative net imports of 40,300 tonnes over the first five months of this year were 7.2 percent higher than the year-earlier period, a noteworthy change of trend after more than a year of negative year-on-year comparisons.

Russia has been a major supplier of nickel to the Chinese market for many years so it's difficult to say to what extent May's imports from this country of 16,400 tonnes, a near four-year high, were amplified by bets on the ongoing ShFE deliverability questions.

The continued acceleration in imports of ferronickel, a cheaper-priced alternative for China's stainless steel producers, looks a better indicator of tightening supply in China.

Imports have more than doubled so far this year to 259,000 tonnes and are running at record rates.

However, the single largest component of this year's ferronickel flow to China, 55,200 tonnes, has come from Indonesia.

This is actually material being produced by the first of the nickel-processing plants that are sprouting up in Indonesia in reaction to the raw materials export ban.

Output from the Tsingshan plant is nickel pig iron rather than ferronickel, as evident from the relatively low average value listed by China's customs, $1,439 per tonne in May, compared with over $4,000 for imports of ferronickel from Colombia and Brazil.

This is decidedly good news for the Indonesian authorities. After all, the very point of the ban on exports of unprocessed ore was to stimulate investment in value-added processing.

It's less good news for nickel bulls, however, since it suggests that some of the supply gap resulting from the ban is now being filled.

But the really bad news for nickel bulls has nothing to do with supply at all.

"WHERE'S THE DEMAND?"

What's provoking all that negative comment from bank analysts is not the subtleties of supply but the outlook for demand, first and foremost in China itself.

Or as Morgan Stanley put it, "where's the demand?" (Global Metals Playbook: 3Q 2015", June 22, 2015.)

Global stainless steel production grew by 8.3 percent last year, according to the International Stainless Steel Forum.

Growth in the first quarter of this year, by contrast, was just 1.1 percent, according to Citi, and not much better in the second quarter either.

Consultancy Wood Mackenzie is now forecasting global growth of just 3.4 percent this year, according to Citi.

And that means significantly slower growth in China, which has been the driver of rising stainless steel production in recent years, just as it has been the driver of higher output across the entire ferrous sector.

This is the real change in the way analysts are now looking at nickel.

It was deemed a pure supply-side story and a super-bullish one at that, given the loss of so much mined output from the Indonesian ban.

Demand growth was taken as a given, meaning that all the focus has been on supply signals such as stocks, both of refined metal on the LME and of nickel ore at Chinese ports, and Chinese import flows.

Demand, and particularly Chinese demand, is now increasingly the question.

And in this respect, nickel is simply reflecting the same concerns that have permeated just about every other industrial commodity from aluminium to zinc.

That's why the LME price is languishing at the current bombed-out levels. And it's why so many analysts think there might be worse to come.

(Editing by Dale Hudson)