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Multiple Bearish Factors: Nickel Prices May Initiate Another Round of Decline
2023/6/1
Since the beginning of this year, nickel prices have experienced a significant downward trend. However, the low inventory status of electrolytic nickel continues, which provides strong resistance when nickel prices fall to around 160,000 CNY/ton. Nevertheless, with the macroeconomic cooling and continuous release of electrolytic nickel production capacity, the concerns over the structural shortage of pure nickel have been alleviated, leading to another downward trend in nickel prices. We believe that under the multiple bearish factors, nickel prices may initiate another round of decline.
Overseas economies have been consistently cooling down this year, especially with the manufacturing sector remaining below the boom-bust line, indicating significant contraction in demand. Looking at the data, the initial value of the Manufacturing Purchasing Managers' Index (PMI) for the Eurozone in May was 44.6, lower than the expected value of 46, and it has remained below the boom-bust line for the 11th consecutive month. The Manufacturing PMI for the United States in April was 47.1, marking the sixth consecutive month below the boom-bust line, and it is expected to further decline in May.
The cooling of overseas economies is attributed to gradually tightening monetary and fiscal policies. After extensive fiscal stimulus and loose monetary policies during the pandemic, both Europe and the United States have started to tighten their policies. In the United States, the recent debt ceiling issue has garnered market attention, and the two parties are gradually reaching an agreement. Additionally, the Congressional Budget Office stated that the estimated budget deficit for the next ten years will decrease by 1.5 trillion US dollars. With the high level of U.S. debt, this will limit future fiscal policy support for the economy. Moreover, as inflation has not yet returned to a reasonable level, the Federal Reserve may still consider further interest rate hikes. Several Federal Reserve officials have stated that the Federal Reserve will not cut interest rates within the year, and the current 5% interest rate level will continue to exert pressure on the economy, restricting economic growth. The European Central Bank also maintains a stance of continuing interest rate hikes.
On the domestic front, the Manufacturing PMI for May was 48.8%, marking the second consecutive month below the boom-bust line, and the new order index was 48.3%, indicating a less optimistic outlook for future demand.
Overall, both domestic and foreign economies are facing downward pressure, and the weakening macro demand is to some extent dragging down nickel consumption.
Due to the impact of the Russia-Ukraine conflict, the circulation of Russian nickel, which accounts for 20% of global nickel supply, has been restricted, leading to a structural shortage of pure nickel. Although nickel supply from Indonesia has continued to grow significantly, Indonesian saprolite nickel ores are primarily used to produce nickel pig iron through pyrometallurgy and intermediate products such as mixed hydroxide precipitate (MHP) through hydrometallurgy, which cannot alleviate the shortage of pure nickel caused by the interruption of Russian nickel supply.
However, with the increase in domestic electrolytic nickel production, concerns over the shortage of pure nickel supply are gradually diminishing. According to Mysteel statistics, approximately 140,000 tons of electrolytic nickel production capacity will be put into operation domestically in 2023, contributing a supply increment of 50,000 tons of pure nickel during the year. This will greatly alleviate the structural shortage caused by the liquidity issues of Russian nickel. In addition, due to the current situation of excess secondary nickel and shortage of primary nickel, there is a significant price difference between primary and secondary nickel, which provides strong motivation for producers to convert secondary nickel into primary nickel. As long as the price difference for conversion remains, the output of electrolytic nickel can be sustained. As the conversion
progresses, the price difference between secondary and primary nickel is expected to narrow. Considering the abundant supply of secondary nickel, it may lead to the convergence of pure nickel prices to secondary nickel prices, providing further downward potential for nickel prices.
In addition to the growth in electrolytic nickel supply, channels for Russian nickel to enter the domestic market have also been continuously opened. Russian nickel is priced based on a blend of LME nickel prices and Shanghai nickel prices, and it engages in long-term contractual transactions with domestic demand, facilitating smoother supply of pure nickel within the country.
Overall, the supply of nickel elements is continuing to grow, and through the construction of electrolytic nickel production capacity and the mixed pricing of Russian nickel, the structural shortage of pure nickel supply is expected to be resolved, leading to a convergence of primary nickel prices toward secondary nickel prices.
The downstream consumption of nickel mainly includes stainless steel and new energy vehicles, with a small portion being used in alloys, electroplating, and other applications. In terms of stainless steel, weak performance in industries such as real estate and home appliances has resulted in insufficient downstream stocking momentum, and social inventories are relatively high. Stainless steel still faces significant pressure to reduce inventories. As of May 26, stainless steel inventories in Wuxi and Foshan reached 881,000 tons, an increase of 17.9% compared to the same period last year. Current stainless steel production is at a near break-even point, with relatively insufficient production power, leading to weak demand for nickel. As for new energy vehicles, although the sector continues to grow, the growth rate of production and sales of new energy vehicles has slowed down, combined with a decline in the market share of ternary batteries, resulting in less-than-expected consumption growth for nickel. Overall, the downstream consumption of nickel remains weak, exerting drag on nickel prices.
Overseas economies have been consistently cooling down this year, especially with the manufacturing sector remaining below the boom-bust line, indicating significant contraction in demand. Looking at the data, the initial value of the Manufacturing Purchasing Managers' Index (PMI) for the Eurozone in May was 44.6, lower than the expected value of 46, and it has remained below the boom-bust line for the 11th consecutive month. The Manufacturing PMI for the United States in April was 47.1, marking the sixth consecutive month below the boom-bust line, and it is expected to further decline in May.
The cooling of overseas economies is attributed to gradually tightening monetary and fiscal policies. After extensive fiscal stimulus and loose monetary policies during the pandemic, both Europe and the United States have started to tighten their policies. In the United States, the recent debt ceiling issue has garnered market attention, and the two parties are gradually reaching an agreement. Additionally, the Congressional Budget Office stated that the estimated budget deficit for the next ten years will decrease by 1.5 trillion US dollars. With the high level of U.S. debt, this will limit future fiscal policy support for the economy. Moreover, as inflation has not yet returned to a reasonable level, the Federal Reserve may still consider further interest rate hikes. Several Federal Reserve officials have stated that the Federal Reserve will not cut interest rates within the year, and the current 5% interest rate level will continue to exert pressure on the economy, restricting economic growth. The European Central Bank also maintains a stance of continuing interest rate hikes.
On the domestic front, the Manufacturing PMI for May was 48.8%, marking the second consecutive month below the boom-bust line, and the new order index was 48.3%, indicating a less optimistic outlook for future demand.
Overall, both domestic and foreign economies are facing downward pressure, and the weakening macro demand is to some extent dragging down nickel consumption.
Due to the impact of the Russia-Ukraine conflict, the circulation of Russian nickel, which accounts for 20% of global nickel supply, has been restricted, leading to a structural shortage of pure nickel. Although nickel supply from Indonesia has continued to grow significantly, Indonesian saprolite nickel ores are primarily used to produce nickel pig iron through pyrometallurgy and intermediate products such as mixed hydroxide precipitate (MHP) through hydrometallurgy, which cannot alleviate the shortage of pure nickel caused by the interruption of Russian nickel supply.
However, with the increase in domestic electrolytic nickel production, concerns over the shortage of pure nickel supply are gradually diminishing. According to Mysteel statistics, approximately 140,000 tons of electrolytic nickel production capacity will be put into operation domestically in 2023, contributing a supply increment of 50,000 tons of pure nickel during the year. This will greatly alleviate the structural shortage caused by the liquidity issues of Russian nickel. In addition, due to the current situation of excess secondary nickel and shortage of primary nickel, there is a significant price difference between primary and secondary nickel, which provides strong motivation for producers to convert secondary nickel into primary nickel. As long as the price difference for conversion remains, the output of electrolytic nickel can be sustained. As the conversion
progresses, the price difference between secondary and primary nickel is expected to narrow. Considering the abundant supply of secondary nickel, it may lead to the convergence of pure nickel prices to secondary nickel prices, providing further downward potential for nickel prices.
In addition to the growth in electrolytic nickel supply, channels for Russian nickel to enter the domestic market have also been continuously opened. Russian nickel is priced based on a blend of LME nickel prices and Shanghai nickel prices, and it engages in long-term contractual transactions with domestic demand, facilitating smoother supply of pure nickel within the country.
Overall, the supply of nickel elements is continuing to grow, and through the construction of electrolytic nickel production capacity and the mixed pricing of Russian nickel, the structural shortage of pure nickel supply is expected to be resolved, leading to a convergence of primary nickel prices toward secondary nickel prices.
The downstream consumption of nickel mainly includes stainless steel and new energy vehicles, with a small portion being used in alloys, electroplating, and other applications. In terms of stainless steel, weak performance in industries such as real estate and home appliances has resulted in insufficient downstream stocking momentum, and social inventories are relatively high. Stainless steel still faces significant pressure to reduce inventories. As of May 26, stainless steel inventories in Wuxi and Foshan reached 881,000 tons, an increase of 17.9% compared to the same period last year. Current stainless steel production is at a near break-even point, with relatively insufficient production power, leading to weak demand for nickel. As for new energy vehicles, although the sector continues to grow, the growth rate of production and sales of new energy vehicles has slowed down, combined with a decline in the market share of ternary batteries, resulting in less-than-expected consumption growth for nickel. Overall, the downstream consumption of nickel remains weak, exerting drag on nickel prices.
In summary, pure nickel is currently facing multiple bearish pressures, while the supply side continues to grow rapidly. The output of electrolytic nickel and the increment in Russian nickel supply alleviate concerns over the structural shortage of pure nickel. Therefore, the Shanghai nickel price may continue to decline.
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