The world nickel market has gone through tremendous upheaval in recent years with strong government intervention and consequent price action leading to price volatility and supply woes. Speculative positioning has exacerbated the situation.

Following the ban on ore exports imposed by Indonesia in January 2014, speculative funds propelled nickel prices closer to $20,000 a tonne, up nearly 50 per cent from the pre-ban levels. However, a combination of factors resulted in prices sliding to pre-ban levels. These included large inventory of Indonesian nickel ore created by China and a surge in Philippines ore exports.

Contrary to earlier expectation, there has been no supply shortage. Sensing the evolving market fundamentals, funds booked profit and prices fell sharply to pre-ban levels. A fall in stainless steel demand put additional downward pressure on nickel prices. A recovery in nickel prices has been delayed due to overhang of stocks. Prices are currently around $13,500/tonne – well below the $18,000 levels seen a year ago.

What are the price prospects for nickel in the second half of this year and into 2016? From a medium-term supply perspective, it is important to remember that the current market conditions are sure to deter investment until prices recover. Failure of some major greenfield projects as well as massive rise in cost of production outside of China has discouraged fresh investment.

Experts point out that the marginal cash cost of producing nickel will be as high as $20,000. In other words, prices will find support at well above the marginal cash cost of production. On current reckoning, nickel is expected to gradually move into a structural deficit sometime next year pushing prices higher out to the year 2020. Currently, there are not enough large-scale projects to meet expected demand growth.

While the supply side projections point to gradually emerging tightness and potential for rising prices, the demand side is tough to gauge. The future of nickel demand, and hence prices, is inevitably tied to the future of the Chinese stainless steel industry. There is already a perceptible shift from investment-driven growth model to a more sustainable model based on consumption and innovation.

Some analysts claim that there is a significant degree of uncertainty for market balances and nickel prices in the years ahead. If demand expectations remain tepid, then prices will be trapped in the $14,000-15,000 a tonne range. As in many other cases, China holds the key to future price movements of nickel.