Nickel market remains at risk of further short squeezes: S&P Global

A short-term risk of another short squeeze in the nickel market remains, causing S&P Global Commodity Insights to increase its 2022 nickel price forecast by 45.9% to $32,868/mt, according to the March Nickel Commodity Briefing Service report released March 31.

"There is a risk that another short squeeze could hit the [London Metals Exchange] nickel price in the near term, given the presence of both a dominant warrant-holding position on available LME stocks and Tsingshan's short position," S&P Global Commodity Insights Metals and Mining Research Senior Analyst Jason Sappor said in the report.

He noted that the 2022 price forecast represented a 78% year-on-year increase due to the intensity of the March short squeeze. However, he added that the forecast was subject to significant risks, including the possibility of higher nickel prices triggering major demand destruction, particularly in the stainless steel sector.

The nickel price was especially volatile during March, with rising concerns that Russia's invasion of Ukraine could result in sanctions on nickel exports from major primary producer Russia, according to the report.

"In 2021, we estimate that Russia accounted for 15.2% of global production of class 1 nickel, a primary nickel product used to make nickel sulfate to manufacture lithium-ion batteries," Sappor said.

The fallout from Russia's invasion and subsequent sanctions on Russian financial institutions and key stakeholders had halted all non-essential cargo bookings to and from Russia until further notice, Sappor said.

"This has compelled nickel consumers in those markets to shun Russian metal and has generated a scramble for alternative sources of supplies, driving the LME three-month nickel price up from $24,716/mt Feb. 24, the day the invasion started, to $28,919/mt March 4," he added.

Trading suspension

The volatility came to a head on March 8, when the LME suspended trading after the three-month spot nickel price reached an all-time high of $101,365/mt in early trading, after closing at $48,078/mt March 7.

It had dropped back to $80,000/mt as of 0815 GMT on March 8 when the suspension took effect, although all trades after 0000 GMT on March 8 were then canceled.

Sappor attributed the price spike to heightened concerns over Russian nickel exports, which activated a historic short squeeze.

"The short squeeze gathered momentum as China's Tsingshan Holding Group Co. attempted to cover its massive short position, which is reportedly equivalent to between 100,000 mt and 200,000 mt of metal," he said.

Trading resumed on March 16 with a preset daily limit of 5%. The limit was then increased to 8% from March 17, 12% from March 18 and 15% from March 21, with the lower end hit each day.

March 22 marked the first day of normal trading, however, both March 23 and March 24 saw the price hit the upper 15% limit. Since then, trading has been normal albeit at low volumes.

The LME three-month spot nickel price was trading at $32,085/mt at 1817 GMT March 31, down 2.5% on the day, but up 52% year to date.

Extreme volatility

Since trading resumed, the LME three-month nickel price had closed in a "gaping" $28,159-45,590/mt range amid extreme volatility, Sappor said, adding that S&P Global forecast the average price to rise nearly 80% year on year in 2022, despite the tightness expected to ease and cool the market going forward.

"We expect the LME nickel price to remain volatile in the near term, as the global nickel market finds equilibrium following recent events," he said.

"There is also a risk that a rise in the nickel price could trigger another substantial short squeeze, with Tsingshan reportedly still having a short position in the market and LME data showing that a dominant 40%-50% warrant-holding position remains on the exchange's available nickel stocks," he added.

S&P Global also lifted its other price forecasts, with the 2023 price raised by $5,000/mt to $25,000/mt.

Market surplus to widen

S&P Global widened its global primary nickel market surplus forecast for 2022 to 46,000 mt from the previously expected 34,000 mt, due to expectations that the macroeconomic impact of the Russia-Ukraine conflict would dent global primary consumption, according to the report.

The forecast was also impacted by S&P Global Ratings Economic Research lowering its 2022 global GDP growth forecast to 3.4%, with the conflict expected to weigh on global economic activity.

"While we have yet to incorporate any curtailments to Russian primary nickel output into our forecasts for 2022, we anticipate that the Russian invasion will prompt a period of upheaval in global nickel trade flows," Sappor said.

He noted that Norilsk Nickel President Vladimir Potanin had recently confirmed market expectations that it was looking to redirect its European and US supplies to China.

"This is likely to displace material from countries such as Australia, which in turn could be diverted toward the US and EU," he said.

The market was expected to remain in surplus through to 2025 at 57,000 mt in 2023, up from the previous forecast of 48,000 mt; 69,000 mt in 2024, down from 79,000 mt; and 8,000 mt in 2025, down from 49,000 mt.

While S&P Global previously forecast a surplus of 17,000 mt in 2026, this was changed to a deficit of 77,000 mt, the first deficit since 160,000 mt in 2021.