Ravindra Rao
After a dismal performance in 2018 most base metals noted gains in first quarter of 2019. However sudden escalation in trade tensions between US-China since early May along with growing worries over global economic slowdown led to most metals paring all of its gains.
The only metal that continued to rally despite the bleak macros has been Nickel. LME three-month forward Nickel prices that had rallied more than 20 percent in first quarter of 2019 hit five-year high of $18850 on 2nd September and at $18000 are up more than 68 percent year to date.
The major reason for the rally in Nickel price despite the bleak macro is its upbeat fundamentals. Expectation of deficit in physical market for fourth straight year, hopes of robust demand from electric vehicle (EV) sector and falling stocks at exchange warehouses have all lent support to the prices. More recently the rally to multiyear high has been due to worries over supply disruption from Indonesia.
Indonesia, one of the largest supplier of Nickel ore, on 30th August decided to expedite ban on Nickel ore exports by two years from 2022 to 1 January 2020. The move is expected to exacerbate worries over tightness in physical market.
Highlighting the impact of ban, Antaike, the research arm of the China Nonferrous Metals Industry Association, said in a note the global nickel market will be in a deficit of more than 100,000 tonnes in 2020 due to the expedited ban, as opposed to a 40,000 tonne deficit without it.
These supply constraints have also led to tightness in physical market as is evident from widening backwardation between LME Cash to three months. The premium of LME Cash over three month jumped to decade high of $104 on 30th August and stood at $83 as on 10th September.
Going forward we expect the uptrend in Nickel prices to persist supported by expectation of deficit for fourth straight year and supply disruption from Indonesia. However, considering the sharp rally in face of deteriorating growth outlook, bouts of correction cannot be ruled out.
(The author is Head – Commodity Research at Kotak Securities.)
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