Nickel, which is known for its usage as a component in stainless steel production, has turned out to be the best performer in the base metals space this year and rallied as much as 56% to $21625/tonne in the first four months of 2014. The upsurge in prices was due to concerns of supply disruption from Indonesia and Russia, the top producers of the metal, which together supply about a quarter of the world’s nickel output.

Indonesia, the world's top exporter of nickel ore and a major bauxite producer, had imposed ban on raw concentrate exports to encourage local processing. To promote this, Indonesia is coming up with nine nickel processing plants this year betting that repercussions from the ban such as job losses will be offset by investment in new plants and output of higher-value products.

Indonesia’s exports ban was a big blow to China. In order to satisfy its domestic requirement, China imported around 90,362 metric tons of Nickel concentrate from other countries.

This was the highest imports by the nation since August 2012 as rising prices encouraged Chinese smelters to purchase the raw material from overseas to boost domestic output.

Adding on to supply woes, Russia has been the target of sanctions from the West given its involvement in annexation of Crimean peninsula. The US named seven individuals and 17 companies linked to Putin’s inner circle and the European Union added 15 individuals to its sanctions list which was further extended to Russian oil giant, Rosneft.

Prices pared gains to 33 percent to $18650/tonne till date, on reports that supplies are sufficient at present as LME stockpiles climbed to 319,590 metric tons, a record 22 percent increase this year.

Besides, customs data show, exports of refined nickel from China almost tripled in June to 16,737 metric tons, exceeding imports for the first time ever by 5,723 metric tons. Also, the probe into metal inventories held at China’s Qingdao port in June led the banks to cut back on financing, leading to more exports.

On the supply side, disruption concerns were put to ease amid speculation that Russian companies selling to Europe and the U.S. would switch to buyers in China. This is not surprising as about 46 percent of China’s refined nickel imports come from Russia, making it the country’s biggest supplier.

The question now is “Will Nickel prices rally further?” The answer lies with Indonesia which earlier this month (August 2014) allowed resumption of copper concentrate exports and stated that it has no plans to wind back a seven-month old ban on exports of unprocessed nickel ore and bauxite. This will likely cut Indonesia’s share of mined output of nickel to mere 8.9% of world supply in 2015 from 29% in 2013.

As Nickel prices have started rallying once again, companies such as Avebury Nickel Mines Ltd. and Poseidon Nickel Ltd. in Australia are prompted to restart operations at idled mines. While Avebury which may produce as much as 12,000 tons of concentrate a year will add to supplies, the additional production won’t be enough to prevent the global market from dropping into a deficit.

In totality, the nickel market balance in 2015 is likely to slip into deficit bringing an end to the glut seen in the past 4 years. This should remain the way going forward till 2017, when facilities to process nickel, bauxite and other metal in China (capacity of about 20 million tons of ore) will start production and bring back supplies in to the market.

All the factors discussed above will likely lead Nickel prices in the international markets higher towards $21850/tonne, while MCX nickel prices can possibly head towards Rs.1330/kg in 2014.

The writer is Associate Director-Commodities & Currencies, Angel Commodity Broking

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