Via AG Metal Miner
While nickel prices modestly retraced from their early month rally, upside price action continued to support the short-term range breakout. Sustained increases should foster further bullish anticipation, which could support a continuation of the short-term uptrend. Meanwhile, volumes remained steady coming into December. However, it’s important to note how potentially volatile contracts for nickel can become amid low liquidity. This will continue to pose a risk for buyers as price action remains susceptible to a quick reversal.
Service Centers Working Through Stainless Inventory Glut
Service centers, brokers, master distributors, and some end users remain flush with inventory. Most service centers indicated that October shipments were relatively flat compared to September. As a result, many have more than four months of stainless inventory on hand. Service center shipments should decline further as they look to reduce stock before December 31st. This is key to improving year-end financials and, in some states, avoiding potential inventory tax liabilities. Although 304 base prices have remained steady throughout the year, this supply glut has added downward pressure to stainless steel spot prices.
Cold Rolled Stainless Shortage Risk Amid Import Declines
Alongside these declining service center shipments, imports have slowed significantly in recent months. Indeed, some industry insiders think all U.S. cold rolled stainless steel products could be under allocation as early as March. Meanwhile, import licenses have also declined. This means that service centers, brokers, and master distributors have all pulled back from buying stainless imports. If history repeats itself, the inventory overhang situation will likely be over-corrected. This will lead to stainless cold rolled shortages until enough imports arrive to fill the gap.
That said, the eroding health of the global economy will continue to pressure overall demand. Indeed, reports are circulating that some Indonesian stainless steel producers suffered losses last month due to reduced domestic and global demand. This triggered some plants to indefinitely reduce output, while others implemented scheduled maintenance.
In the U.S. specifically, the manufacturing sector returned to contractionary territory. In fact, for the first time since May of 2020, the ISM Manufacturing PMI descended beneath the expansion/contraction threshold, reading a mere 49 for November. That said, U.S. manufacturing remains strong relative to other parts of the globe. For example, both the Eurozone and Chinese Caixin Manufacturing PMIs have remained below 50 since June.
Indonesia Loses EU Challenge to Export Ban
On Nov. 30, the World Trade Organization (WTO) released its final report on Indonesia’s ban on nickel ore exports. As MinerMiner previously noted, the ban went into effect in 2020. At the time, it was part of a larger strategy to attract investments for value-adds to Indonesia’s nickel supply chain. The EU challenged the ban on the grounds it unfairly restricted access to key raw materials, specifically for stainless steel producers. As Indonesia’s President, Joko Widodo, predicted, the WTO ruled in favor of the EU.
According to the decision, the export ban and domestic processing requirements were inconsistent with an article of the General Agreement on Tariff and Trade. The specified article prohibits WTO members from banning or restricting imports and exports outside of duties or taxes. Indonesia had justified the ban by stating its measures were “temporary” and designed to prevent critical shortages of raw materials. Such a move is indeed permitted by other articles within the agreement.
Despite the loss, Indonesia plans to appeal. As a whole, the ban was wildly successful for the country. Indeed, it will likely serve as an incentive for Indonesia to continue limiting exports in some form. Currently, the country accounts for roughly 38% of global nickel production, giving it significant influence over the nickel price. In fact, due to the investments the ban triggered, the archipelago has since become the second-largest producer of stainless steel.
Of course, the WTO’s decision will not undo Indonesia’s newfound dominance within global stainless steel production. Many insiders expect Indonesia to adopt some form of export duty allowed by trade regulations in the near future.
How Long Will the Nickel Price Remain Bullish?
The nickel price index showed a short-term uptrend last month. However, an element of directional uncertainty remains. The downturn in Europe and the threat of a prolonged recession in the U.S. will continue to drag on prices. As mentioned above, the largest consumer of nickel, stainless steel production, appears to have peaked due to eroding demand.
On top of that, a number of the factors that underpinned last month’s bullishness have since evaporated. Contrary to market expectations, the LME chose not to ban or limit Russian material. Albeit less surprising, the removal of Indonesia’s export ban will also add downside pressure to the nickel price. That said, this has yet proven sufficient to shift price direction. Moreover, the decision’s impact could be further mitigated should Indonesia implement previously announced nickel pig iron (NPI) tariffs or any new duties to replace the ban.
China’s shifting approach to zero-COVID served as the other dynamic force. The month opened to rumors of a potential end date, which supported a rally across the base metal category. By mid-month, however, the rallies stagnated amid record outbreaks and new lockdowns. Then, in an unexpected twist, rampant protests and growing social unrest caused Beijing to unravel lockdowns and again loosen restrictions.
China reopening will likely prove a slow process. They currently face a surging exit wave and low public immunity due to lack of exposure. Still, the move will nonetheless have a bullish effect on metal prices as the country’s demand reemerges. How bullish remains uncertain as China continues to grapple with other economic challenges, including its property sector crisis, an aging population, and high debt levels.
By AG Metal Miner
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