By Raul de Frutos
The Stainless MMI fell by one point to 51 in February. Although nickel prices didn't decline sharply in January, prices made a new 12-year low.
Nickel was the worst performer among industrial metals in 2015. Interestingly, now analysts see nickel as having the greatest recovery potential. On average, analysts expect nickel prices to rise 20% this year and by almost 40% next year.
The main reason why analysts expect such a recovery is because nickel has fallen harder than any of its peers, being the only metal trading below the price lows of the 2008 financial crisis. However, to us, the fact that a metal has fallen in price is not reason enough to expect higher prices any time soon.
Another factor making analysts turn bullish on nickel is that they believe nickel is likely to see immediate cutbacks. Brazilian miner Votorantim Metals announced in January its intentions to suspend two nickel operations, which would mark the first meaningful shutdown in the West.
Also, in Australia, Clive Palmer's Queensland Nickel said it would lay off 240 workers near Townsville. These announcements are definitely a sign that mining companies are starting to struggle on low prices, but companies can struggle for a long time before shutdowns actually occur. The nickel market is facing the same issue as any other industrial metal: supply is doing anything it can before shutting down.
Believing that a wave of shutdowns is about to come among nickel producers seems like too much to expect from producers. Shuttering capacity remains challenging from both financial and social perspectives. In addition, non-China producers keep convincing themselves that Chinese nickel pig-iron producers will close first, partly because of the nickel ore constrains after Indonesia's export ban and partly because of the perception that NPI makers are at the top of the global cost curve.
The issue with that prediction is that NPI producers have managed to cut costs and find a substitute to Indonesian ore - supply from the Philippines.
We believe that shutdowns will probably come gradually since any individual closure will give hopes of survival to the rest of the market participants as they face less competition, encouraging those left over to keep running.
What This Means For Metal Buyers
Some people might see nickel as an attractive asset just because it looks "cheap" compared to historical levels. That could be true in the long term, but the timing could be way off. Right now, we don't see any signs of a bottom. Nickel prices will likely turn around with the rest of the base metal complex, but that time hasn't come yet. Stainless buyers should stay disciplined to their buying strategy.