Traders stand outside the open outcry pit following a trading session at the London Metal Exchange. On the LME, the price for nickel three-month delivery is trading around $9,000 per tonne, a level last seen during the depths of the Global Financial Crisis in 2008.

By Andy Home
London


Even within the bombed-out landscape that is the industrial metals sector right now nickel is something of a stand-out.
On the London Metal Exchange (LME) the price for three-month delivery is trading around $9,000 per tonne, a level last seen during the depths of the Global Financial Crisis (GFC) in 2008.
Last month it fell further than even that historical yardstick, hitting $8,145, the lowest price since 2003. London nickel is now down by 40% since the start of the year. The next worst performer, zinc, is down by “only” 30%.
“Nickel prices have already seriously deviated from the market fundamentals and the whole industrial chain has fallen into a vicious circle.”
That’s how Chinese nickel producers described the current state of affairs in an open letter announcing plans to cut production from this month.
The producers’ language is a coded attack on speculators operating on the Shanghai Futures Exchange (SHFE) and echoes allegations of “malicious” short-selling made by other Chinese metal producers.
But is nickel’s “vicious circle” just about excess speculative activity or does it result from a supply chain that simply can’t rebalance in reaction to demand weakness?
There is no doubt that nickel has been singled out for particularly harsh treatment by the bear army operating across all the SHFE-traded metals.
The Shanghai contract was only launched in April this year but got off to a running start with strong volumes and open interest.
Both have seen extraordinary surges over the last month or so as the price has collapsed, mirroring trading patterns across the suite of base metals traded in Shanghai.
The scale of positioning suggests that Chinese hedge funds, which have been in the metals news all year, have been joined by what seems to be a retail crowd attack on all industrial metals.
Maybe it’s because metals are a way of expressing a bear view on the whole Chinese growth story that is no longer possible on the stock market after the authorities clamped down on short selling.
Whatever the murky origins, this bear attack is generating a fight-back by Chinese metal producers across the board.
In the case of nickel this will take the form of production cuts by eight major producers, a mix of refined metal and nickel pig iron (NPI) operators.
In addition, nickel producers are asking the Chinese government to consider buying up 30,000 tonnes of surplus metal, a form of emergency state aid last used in 2009.
It remains to be seen just how effective these cutbacks will be. The political messaging may be more important than the market impact.
As ever with such collective efforts, there are question marks as to just who will cut what and how long the agreement holds together before one or more participants are tempted to break ranks.
But the bigger problem facing Chinese producers is that while they are cutting output, others are still churning out more units.
Brazil’s Vale, for example, said on Tuesday it expects to lift production at its Goro operations in New Caledonia by 50% next year.
This is good news for Vale, which has struggled for years to master the new, problematic high-pressure acid leaching technology used by Goro.
Designed to produce 58,000 tonnes per year of nickel products, Goro produced just 18,700 tonnes last year in what was its fourth year of operation. Production in the third quarter was equivalent to an annualised run rate of 29,000 tonnes.
But it is decidedly not good news for a nickel market that is now looking to align production with weakening demand.
Nor is Goro the only plant still in ramp-up mode.
The Ambatovy plant in Madagascar is close to reaching its nameplate capacity of 60,000 tonnes per year.
The Ramu project in Papua New Guinea has just experienced its best quarterly production rate since starting up in 2012 and is, according to minority shareholder Highlands Pacific , on course for full capacity of 31,000 tonnes next year.
Lagging behind the others is the 60,000-tonne per year Koniambo ferronickel plant in New Caledonia, where Glencore is rebuilding one of the furnaces at its new plant.
All these projects were planned and launched at a time of much higher prices. Now operators have little choice but to compensate for the sunk costs of construction by bringing them on stream as quickly as they can, which is not very quickly in most cases.
While new capacity is still coming on stream, existing producers outside of China have largely failed to react to the collapse in pricing. True, a couple of smaller operators have been forced into administration but even one of these, Mirabela Nickel, is still producing metal at its Brazilian operations, albeit at reduced rates.
Everyone else is standing pat, even though industry cost curves suggest that all but a few are losing money.
Why? The answer is in large part because everyone assumes that China’s nickel pig iron (NPI) sector is set to collapse over the next year. In part this is also down to the low pricing environment but in larger part it is because Chinese NPI producers haven’t found a sustainable replacement for the nickel ore they were sourcing from Indonesia before that country banned exports at the start of 2014.
Replacement ore from the Philippines has not fully filled the gap and the huge stocks of Indonesian ore accumulated prior to the export ban are largely depleted.
It follows that China’s NPI production must fall, creating a gap in the supply chain that must be filled by others. Everyone else, in other words, is hanging on in there in the firm belief that NPI closures will in themselves rebalance the market.
This is the real vicious circle facing nickel producers everywhere.

♦ Andy Home is a columnist for Reuters. The opinions expressed are his own.