Nickel rises above $20,000 on supply concerns

China , Commodities , Indonesia , Japan , Metals , Nickel , Russia , Ukraine May 12, 2014 No Comments

Nickel - New CaledoniaNickel outperformed other industrial metals last week, surging 9 per cent for its steepest weekly advance in four years. Prices of the metal used in stainless steel climbed to a two-year high May 9 after the closure of Vale SA’s New Caledonia plant stoked concerns over supply already inflamed by Indonesia’s export ban from January.

The per-metric ton price of three-month delivery nickel was at $20,500 last Friday after adding 5.6%. The metal saw its largest rise since February 2010. Major producer Vale announced last week it has suspended production at its 40,000-tonne-per-year Goro nickel processing plant and mine in New Caledonia.

The president of New Caledonia’s Southern Province, Cynthia Ligeard, ordered Brazil’s Vale, the world’s second biggest nickel producer, to halt operations immediately, after an estimated 100,000 litres of effluent ended up in a creek, according to Radio New Zealand International.

Goro was out of action for most of the second half of 2012 due to problems with the acid plant. It was out of action again for six weeks in the fourth quarter of last year after what Vale referred to as “a failure of its effluent placement and dispersion line”.

While analysts said the shutdown could prove short-lived, the news fed already bullish sentiment in nickel. Nickel prices on the London Metal Exchange (LME), already up by more than a third this year due to supply constraints in Indonesia and the possibility of sanctions on Russian metal, hit the highest in more than two years on Thursday.

While the Vale stoppage alone won’t move the needle much in terms of supply – Goro’s annual capacity of 60,000 tons barely eats into Bank of America Merrill Lynch projections for 2014 global production of 2.035 million tons – the news added to already-heightened concerns over supply of the metal.

We are in a bull mode, so any outage is exaggerating the move” higher said Rob Montefusco, a senior commodities broker at Sucden Financial. Earlier this week Glencore Xstrata said output at its Koniambo mine, also in New Caledonia, had been disappointing, and that its 26,000-tonne nickel production forecast for this year was being reviewed.

“Everybody’s been very bullish on nickel since the beginning of the year, and when you see one of the top producers close down a plant, it’s not surprising to see prices pop,” said Thomas Capalbo, a metals broker with Newedge in New York.

What’s going on in the nickel options market is even more dramatic. April volumes of almost 143,000 lots were not only a fresh monthly high but were about half of what traded over the entire course of last year. Even that may understate the real level of interest, if there are bigger positions that are submerged in the over-the-counter part of the market.

Punters have been snapping up call options at strikes up to $30,000. The sellers of those options have to buy to hedge their exposure as the market punches higher, their own actions of course acting as a further price accelerator.

The potential for more economic sanctions by the U.S. and Europe against Russia helped boost prices, according to Societe Generale SA. Russia is home to MMC Norilsk Nickel, the biggest producer the refined metal. The country is testing its army’s combat readiness, ramping up tensions after pledging a pullback from Ukraine’s border.

Indonesia hasn’t allowed any exports of unprocessed nickel ore in more than four months. The country banned exports of nickel ore and other raw commodities in January, as it seeks to broaden its economy by forcing miners to perform the lucrative task of refining their metal inside the country.

China, which consumes nearly 50% of the world’s nickel, started stockpiling the metal ahead of the ban, further adding to the dearth of supplies in the market. China’s stockpiles could be depleted by this fall unless Indonesian exports resume.

Today, the contract for delivery in three months on the London Metal Exchange rose as much as 4.9 percent to $20,870 a metric ton, the highest since February 2012, and was at $20,580 at 4:17 p.m. in Tokyo.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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