Nickel: Poised To Hold Better Prospects

Nickel is a major commodity and stands with a host of industrial applications that make it an extremely crucial metal within the base metals pack. The metal finds place in various uses from the infrastructure sector to consumer durables and chemical production to various indirect applications in industrial activity. Globally, the metal is known for its usage as a component in stainless steel production and in non-ferrous steel alloys. 

With its demand and applications in varied industrial sectors, it has been seen in the past few years that consumption of the metal has grown phenomenally in the emerging and developing economies and is not restricted to the developed countries. While the developed economies earlier accounted for a large share of world nickel demand, the scenario has seen a shift .

When world demand for nickel is compared between 2007 and 2013, one can see that the emerging and developing economies have now become major contributors to nickel demand. This is seen on the back of huge growth in infrastructure and industrialisation. 

Back in 2007, China accounted for 24 per cent of world nickel consumption but in 2013 the country’s share jumped significantly to 50 per cent. On the other hand, the Euro Zone that contributed to 31 per cent of world nickel demand in 2007 saw a decline in share to 14.6 per cent in 2013. Japan and the US too witnessed a decline in nickel’s consumption share from 14.5 per cent and 8.7 per cent in 2007 to 9 per cent and 6.9 per cent respectively. This suggests that China has become a major player in the world nickel market and changes in demand patterns along with economic performance in the country have a huge impact on prices. Average consumption growth rate in China between 2008 to 2013 has been at the pace of 50 per cent, thus making the Asian tiger a major price driver. In the current context, slowdown in China has impacted nickel, as prices in dollar terms have slipped to a monthly average of USD 13998/tonne in December 2013 from USD 20540/tonne in February 2012. Coming to the supply front of nickel, China again dominates this territory with a whopping share of 35 per cent in 2013 as against that of 20 per cent in 2007. Huge capacity expansion in the past 10 years is responsible for the jump in China’s supply of nickel to the world market. 

CURRENT DEMAND-SUPPLY DYNAMICS 

Coming to the current picture on the demand-supply front, it is seen that the export ban of nickel ore from Indonesia is likely to have a positive impact on prices this year. This constraint on the supply front from a country that accounts for more than 15 per cent of world nickel mining output will be supportive for nickel in terms of prices and inventories. However, what needs to be ascertained over the coming year is - how this ban actually happens and can this really affect global supply of nickel at a time when the market is suffering from a surplus? In 2011 and 2012, Indonesian nickel output stood at 227 thousand tonnes and 255 thousand tonnes respectively. For 2013, it is expected to rise by more than 37 per cent to 350 thousand tonnes. However, for 2014 and 2015, output is likely to grow at a slow pace of around 6 per cent to about 335 thousand tonnes. 

WITHERING SUPPLY TO SUPPORT NICKEL PRICES IN 2014 

Over the year 2013, nickel prices fell prey to bears and remained in that territory as multiple factors continued to add as a negative factor. From expectations of rising output to indications of an oversupplied Chinese market, prices also reacted to the broad-based selling seen in various asset classes and commodities on account of concerns on the QE taper. But price trend for 2014 looks stable on the basis of expected decline in production growth and rise in consumption due to an improving global economy. 

The nickel market is forecasted to move towards a balance from mid-2014 and the year 2015 is likely to see a marginal deficit. Even a slight shift from situation of major surplus to a minor deficit in 2015 can lead to a recovery and stability in nickel prices. Another important factor that could greatly influence nickel prices in 2014 would be the export ban on nickel ores from Indonesia. If this factor actually hits supply of mined nickel in the world markets then prices could take major support. 

Overall, this year nickel will fare better and the annual average prices could see a recovery from 2013’s USD 15,000/tonne and lead it closer to USD 20,000/tonne in 2014 and 2015. 

PRICE PERFORMANCE 

On the price performance front, we have seen that nickel has opened the year 2014 on a stable note. While all other base metals have succumbed to pressure since the start of the year, nickel has witnessed gains. This resilience shown is on the back of the supply threat arising from Indonesia. Nickel this year is expected to be the outperformer within the base metals pack and the supply-side situation will be the main factor that will influence upside in prices. Its year-to-date performance shows an increase of around 2 per cent in prices on the LME and the MCX. In 2013, Indonesia mined around 326,000 metric tonnes of nickel ore and the shortage of ore supply from the country will help bring down the surplus in the world nickel market from 196,000 metric tonnes in 2013 to just 53,000 metric tonnes. In 2015, the global nickel market is likely to be in a state of deficit and this will further support gains in prices. 

Global consumption for nickel is forecasted to rise by about 6 per cent in 2014 and supply on the other hand is expected to fall by more than 1.5 per cent. The gap in supply will ensure a supportive price trend for nickel in 2014. 

Currently, news of increase in Chinese stainless steel output has also added upside support to nickel prices. Output of crude stainless steel is likely to touch a record of 39 million metric tonnes this year in China; in turn raising hopes of jump in nickel usage. Amongst South East Asian countries, China is the biggest importer of nickel and ahead of the ban, it was seen that imports of the metal in China had jumped significantly in the country. 

OUTLOOK 

Currently, prices on the LME are trading around USD 14,000/tonne and rise in prices over the short-term is expected given the positive and supportive supplyside developments. Hence, from a short-term perspective we are bullish and thus recommend a buy in nickel futures on the MCX in the range of Rs 845-835, with a stoploss of Rs 774 and a target of Rs 990 on the upside.