Chinese firm Tsingshan Holding Group has been buying large quantities of stainless steel ingredient nickel on the London Metal Exchange (LME) to supplement its own output, two sources familiar with the matter said.
They could not specify the amounts Tsingshan has bought.
Nickel prices slid to their lowest for the year in the second quarter as investment funds sold on the expectation of slowing demand from Chinese stainless steel mills as economic activity came under pressure from the US-China trade war.
But as unexpectedly higher demand numbers started to trickle out, the same funds rushed to cut their bets on lower prices.
In the middle of that, sources said, Tsingshan bought heavily and the market started to worry about top producer Indonesia banning shipments of ore from 2022.
"Tsingshan has been buying on the LME, they are short of nickel because stainless steel production didn't fall as people thought it would," one nickel trading source said.
Tsingshan did not respond to Reuters' requests for comment, via phone and email.
Sources said Tsingshan plans to produce 10 million tonnes of stainless steel this year. Analysts say it will need more than 400,000 tonnes of nickel in 2019 compared with the 250,000 tonnes plus it has access to.
"Its 300 series stainless output in China in the first half is up 25 percent year-on-year," a nickel industry source said.
The 300 series typically uses 8.0-8.5% nickel compared with 200 series stainless steel with only 1-2.5% nickel and 400 series which contains no nickel.
Nearly 70% of global nickel consumption, estimated at 2.4 million tonnes this year, is accounted for by stainless steel mills, a majority of which are in China.
Wood Mackenzie analyst Sean Mulshaw estimates China's stainless steel output in the first half of this year at 14 million tonnes, up 11% from the first six months of last year.
Mulshaw expects China's output to climb 8-9% this year to 28-29 million tonnes out of a global total of 52-53 million tonnes, a 4% gain from 2018.
Higher stainless steel output and stronger than expected demand for nickel have pushed benchmark prices on the LME to above $15,000 a tonne, their highest since late June last year and a gain of more than 25% since early last month.
Nickel prices are up about 40% so far this year.
"Prices fell due to the forecast of large amounts of nickel pig iron coming from Indonesia and from the Chinese domestic market, and forecasts that the stainless steel market was weak," said Antaike's chief nickel analyst Xu Aidong.
"But now we know (China's) stainless steel output in the first half of 2019 increased 10%."
Indonesia relaxed a ban to export ore in 2017. A senior government official pledged this week that authorities would enforce a ban on raw ore exports by 2022 to make miners process minerals in the country.
"A few weeks ago as stainless production numbers started to filter out, we had a short covering rally. The idea of the Indonesian ban surfaced and Tsingshan and others started buying nickel," another trading source said.
"The rally started in Shanghai and created an 'arb', so they bought on the LME as well."
"Arb" is a reference to price differences between nickel contracts on the LME and Shanghai Futures Exchange after factoring in shipping costs and taxes.
Lower prices on one exchange attract buyers, as seen in the changes in inventory at warehouses registered by the LME and those monitored by the ShFE.
Analysts say nickel prices need to be higher to incentivise new projects around the world to meet growing demand from the fast-growing electric vehicle sector, which uses rechargeable batteries containing nickel.