LONDON: Nickel has been the consistent underperformer of the base metals suite traded on the London Metal Exchange (LME) so far this year.
Last month LME three-month nickel sank to $15,450 per ton. That was the lowest level since the third quarter of 2009, when metal prices were gradually recovering from the Great Manufacturing Contraction.
A late-July bounce was of the dead-cat variety and nickel is once again teetering on the edge of a technical cliff.
From a demand perspective this is unsurprising.
Nickel's main usage is in stainless steel, a sector that is prone to seasonal weakness over the Northern Hemisphere summer months.
Seasonality is currently overlaid with a renewed global manufacturing contraction, as evidenced by Wednesday's slew of negative purchasing managers indices.
Exacerbating both trends is the nickel price itself, which feeds into the lagging alloy surcharge charged by stainless mills.
At times of weak prices this creates a negative feedback loop as stainless steel distributors react to falling nickel prices by destocking, further reducing demand.
No great surprise then that surplus nickel has been hitting LME warehouses in ever-increasing quantities. Registered stocks hit a one-year high of 115,884 tons earlier this week.
Tellingly, it is not just “commodity-grade” full-plate cathode that has been flowing into the LME system. Stocks of bagged briquettes, a premium product, have also surged to 11,868 tons.
And it is not just on the LME where stocks have been growing.
The market has been aware for some time of the existence of shadow stocks sitting off-market in China. Locals estimate 25,000 tons of the stuff are sitting in one large warehouse alone in Shanghai.
That itself may just be the poorly-visible tip of a much bigger iceberg.
More surprising is the supply response to falling nickel prices.
Just a couple of months ago analysts were agreed that cost-curve support would prevent the nickel price falling to the sort of level currently trading.
China's nickel pig iron (NPI) sector defines the top end of the global cost curve and with production costs in excess of $20,000 per ton, most of it should have stopped by now.
Sure, prices often have to undershoot theoretical cost-curve support before any metals producer bites the bullet and shutters capacity.
And sure, defining NPI costs was always a tricky task, given the fractured nature of the industry and the use of various technologies, each with a differing cost profile.
But several months on and a few thousand dollars lower, it is clear that things are not working out as expected.
The problem is a negative feedback loop of a different kind, one recently highlighted by researchers at China International Capital Corp (CICC).
They point out that the more the nickel price falls, the cheaper the price of the laterite ore used to feed NPI production.
With ore prices down by more than 40 percent from their peak, NPI costs have declined by 25 percent from 2011 levels to around $16,500 per ton, according to CICC.
Moreover, there is still potential downside to this cost deflator.
Pre-emptive stockpiling of ore ahead of the export ban by Indonesia, the main origin supplier to the Chinese market, has resulted in a massive stocks build.
There are somewhere around 16 million tons of nickel ore sitting at major Chinese ports, enough both to mitigate an expected period of lower Indonesia shipments and to keep ore prices under pressure in the short term.
CICC warns that “too rigid an assessment of cyclical 'cost support' can prove treacherous.”
Quite how treacherous the nickel market is now finding out.
Outside of China's NPI sector the wild card in nickel's supply picture has for some time been the success or otherwise of the new generation of high-pressure-acid-leach (HPAL) projects.
There are four of them capable of supplying a combined 200,000 tons of metal at full capacity.
The Goro project in New Caledonia has come to define the technical difficulties with this relatively new technology.
Now run by Brazil's Vale and renamed Vale New Caledonia, Goro has consistently failed to operate in any sort of consistent way.
It has, once again, been taken off line after a May leak in the acid plant. It won't produce anything in the third quarter but will be back in the fourth quarter, according to Vale.
— Andy Home is a Reuters columnist. The opinions expressed are his own.
Vale has to be confident, given the amount of money it has sunk into Goro. Everyone else will add the word “maybe” to that statement.
The question was always whether Goro's issues were project-specific or symptomatic of the HPAL process.
Analysts' views have tended to fluctuate with Vale's quarterly updates on the trials and tribulations of Goro.
First Quantum's success to date with its Ravensthorpe project in Australia, however, puts Vale's recurring Goro nightmare in useful context.
Ravensthorpe was discarded by BHP Billiton after a series of technical difficulties which appeared to reinforce the impression that HPAL was intrinsically a problem technology.
First Quantum, however, has now operated the project for two successive quarters without major mishap. Cumulative production was 12,800 tons of payable nickel in mixed hydroxide in the first six months of this year.
The jury on HPAL is thus split at the moment.
The other two projects, Ambatovy in Madagascar and Ramu in Papua New Guinea, are both at the trialing stage.
Sherritt International, which is the operator of Ambatovy, and Highlands Pacific, a minority shareholder in Ramu, both gave upbeat assessments of progress in their respective second-quarter reports.
Sherritt's biggest headache at Ambatovy right now is not technology. The plant has already produced refined nickel briquettes.
Rather, the transitional government in Madagascar is still sitting on a key operating permit necessary to start commercial ramp-up.
Until Ambatovy and Ramu get to that stage, the question of whether HPAL can be made to work will continue to cloud the nickel supply picture.
Analysts had a collective downer on the nickel price even before the latest slide in prices. That much was evident in the Reuters poll in January.
Excess supply was always a concern.
While HPAL producers tweak and tune their plants, others are bringing on line new ferronickel projects, although, once again, not Vale, which lost both furnaces at its Onca Puma project in Brazil last quarter.
But the downside was assumed to be limited by that much-talked-about cost curve support.
The lowest average price forecast for 2012 in the January poll was $17,375 per ton. Even in the mid-year poll the lowest forecast was $16,850.
Now, however, there are two negative feedback loops at work, falling nickel prices both deterring stainless buyers and cutting costs at marginal producers.
Both will of course go into reverse once the nickel price recovers.
What, however, will cause that reverse?
It's not going to be demand, not until the summer doldrums are over at least, and it doesn't look like it's going to be cost-curve support either.
