Market Dynamics: Betting on Decline
Investors are increasingly betting against nickel prices on the London Metal Exchange (LME). The current positioning reflects the most significant short interest since 2019, a direct response to a notable decline in nickel prices throughout the year. As of the latest reports, nickel trades at approximately $18,000 per metric ton, a steep 42% fall from the beginning of the year. The market is also grappling with technical pressures, with the metal’s price teetering around support levels that have held since late 2021.
Supply Surge and Fundamental Outlook
Underpinning the bearish sentiment is the expectation of a considerable oversupply, primarily driven by increased production in Indonesia. The country’s output surge has been dramatic, with a 48% increase last year and a further 31% uptick in 2023. According to the International Nickel Study Group (INSG), the global nickel market surplus is projected to reach 223,000 metric tons this year and could expand further to 239,000 metric tons in 2024.
Despite strong demand forecasts fueled by nickel’s critical role in electric vehicle (EV) batteries, the market is inundated with supply, primarily from Indonesia, which aims to position itself as a key player in the EV battery material sector.
Indonesia’s Role and the Product Gap
The key to the current bearish stance is the transformation of Indonesia’s nickel production from lower-grade intermediate products, which are not LME-deliverable, into Class I refined metal. The LME is aiding this transition by expediting the approval of new refined nickel brands, particularly from Chinese producers.
Notably, Huayou Cobalt’s refined nickel has already been approved, with others awaiting the green light. This shift is anticipated to narrow the price gap between different nickel classes, with a trickle of Chinese-brand nickel already appearing in the LME’s reports.
Stocks and Speculations
While LME nickel stocks have increased modestly from August lows, the absolute figures remain historically low, and a significant portion is earmarked for removal from warehouses. This indicates that the anticipated flood of refined metal into LME warehouses, which would reflect the global surplus, has not materialized to the extent expected.
The uncertainty of the timeline for when the nickel market will rebalance and the surplus will fully affect LME stocks renders the “big short” a significant speculative move. It’s a waiting game, with investors watching closely for signs that the gap between product classes is indeed closing as swiftly as the bearish bets would suggest.