Nickel, which was one of the worst performing metals in 2013 due to oversupply and feeble demand, has recovered remarkably this year. Nickel prices climbed from around 14,000 per ton in January to over 18,500 per ton in June, benefiting miners such as Vale (NYSE:VALE). Prices rose sharply as Indonesia, one of the world's leading nickel ore suppliers, placed a ban on exports of minerals, raising supply chain concerns. However, nickel prices could come under pressure due to two important factors.
Factors that have boosted nickel prices in 2014
Nickel prices nosedived last year due to fundamental imbalance in the market. Indeed, as I mentioned in a previous article, citing the International Nickel Study Group's finding, the total supply of refined nickel rose almost 11% to 1,944,700 tons in 2013, creating a surplus of 173,000 tons.
However, nickel ore prices received a shot in the arm after Indonesia decided to ban mineral ore exports earlier this year. Indonesia accounts for about 20% of the total nickel ore exports.
Nickel prices climbed as China, which consumes about 45% of the global nickel production and imports the bulk of its nickel ores from Indonesia, began stockpiling amid concerns that the export ban would create a shortage. As I had pointed in article in April, inventory levels at bigger Chinese nickel pig iron producers are expected to deplete by the end of this year. The stockpiling from China boosted nickel prices, which even crossed $21,000 per ton mark in May.
Stronger nickel prices will benefit the likes of Vale as the company grapples with weaker iron ore prices. Indeed, robust nickel prices will help Vale offset some of the weakness in the iron ore market. Robust prices will also help BHP Billiton (NYSE:BHP), which is looking to offload its nickel assets. As I noted in a previous article, the bullish outlook for nickel prices means that BHP Billiton could see significant interest in its nickel business.
While nickel prices have seen a pullback from the levels reached in May, they are still sharply higher for the year. However, prices could come under pressure due to two important factors.
Firstly, the global nickel ore demand ex-China is still weak. And secondly, there is growing threat that the European Union (EU), which is investigating both China and Taiwan's alleged dumping of stainless steel in Europe, could take punitive actions by imposing anti-dumping duties. This is worrisome. About 75% of the total nickel supply is used in stainless steel production. And since China is one the key stainless steel exporters to Europe, possible punitive actions such as higher tariffs on EU-imports could affect the demand for nickel ore in the long run.
Demand muted ex-China
According to Bloomberg, which cited Mike Dragostis, a senior market strategist at Toronto-based TD Securities; the demand for nickel ex-China is not very encouraging. The demand is muted as there is still sufficient inventory level throughout the world.
Indeed, data by Bloomberg shows that the net long positions were about 40% of open interest in the third week of June compared to 61% in May.
This sharp decline in net positions suggests that speculators are anticipating the end of nickel's bullish run.
EU to investigate China's alleged dumping of stainless steel
Another factor that could seriously weigh on nickel prices is the possibility of higher tariffs imposed by the EU on Chinese and Taiwanese stainless steel.
Last week, the European Commission initiated an inquiry on possible unfair trade practice carried out by Chinese and Taiwanese manufacturers. The commission said that early findings show that sharp increase of stainless steel imports has hit European steelmakers hard. According to The Wall Street Journal, which cited Eurofer, a steel industry association, EU's import of cold-rolled flat stainless steel from China has climbed nearly 10 times in term of value from 2002 to $1.03 billion, last year. The industry association alleges that China has made heavy investments on building production capacity. Eurofer says that China's domestic demand is incapable of absorbing its large production capacity, and hence Chinese stainless steel manufacturers are dumping in the EU.
In order to cut imports from China, European steel makers such as ArcelorMittal and ThyssenKrupp AG have been lobbying in recent years.
If the EU Commission finds that Chinese and Taiwanese manufacturers have been dumping and that these imports have damaged domestic industry then it can impose higher tariffs.
According to the official statement, the commission has to decide within nine months whether it should levy temporary anti-dumping duties for six months and within 15 months whether to impose definitive duties for five years.
Given these factors, nickel prices could come under pressure in the coming months.