Nickel prices on the London Metal Exchange surged to five-year highs Monday, with three-months metal coming within striking distance of the $19,000/mt level for the first time since August 2014 before easing back in later trade.
"The Indonesian government announced on Friday that the nickel ore export ban would be brought forward by two years, and is now to enter into force on January 1, 2020," Commerzbank said in a research note Monday, adding: "Though this had already been hinted at in recent weeks, the nickel price is nonetheless up in response."
Indonesia was the world's largest nickel mining producer last year, and the second-largest exporter of nickel ore and concentrate after the Philippines, the German bank noted.
In its first-half results statement last month, major Russian producer Norilsk Nickel suggested that "in the long run, the biggest potential disruption for nickel supply and the market overall could come from the Indonesian government," adding that country's planned export ban -- whether reinstated as scheduled in 2022 or earlier -- "will put around 10% of global nickel production at risk, which could substantially alter the global supply landscape."
It remains to be seen whether the Philippines, "as the only other alternative source of nickel ore feed to China, will be able to compensate for the potential loss of Indonesia supply and to what extent," Nornickel added.
Nickel prices have soared by almost 50% in the last two months, with market participants "still concerned that the global nickel market could be significantly undersupplied in the next few years," Commerzbank said.
But, the bank added, "though we believe that these concerns justify a high price, the rapid increase -- which was driven in part by speculation -- appears exaggerated to us."
Brokerage Marex Spectron said Monday that according to its estimates the speculative net long position in the LME had reached 37,000 lots, or 21.5% of open interest, as of the close of business on August 29 -- the highest since June 2018 when it peaked at 59,500 lots, or 33.5% of open interest.
The spike in nickel prices is putting upward pressure on alloy surcharges -- charges levied by stainless steel producers to reflect changes in raw material costs, which are particularly sensitive to nickel price moves.
On August 21 Finland's Outokumpu, Europe's largest stainless producer, set its alloy adjustment factor for type 304 (4301) flat products at Eur1,557/mt ($1,707/mt) for September, up Eur175/mt from the previous month to its highest level since August 2018.
LME three-months nickel closed August 21 at $15,770/mt, around 15% below current price levels, so if the current rally is sustained a further hefty jump in surcharge levels for October would be on the cards.
The sharp rise in surcharges is problematic against a background of continued high import penetration in the European stainless market, where imports priced on an all-in "effective" basis are sharply discounted in comparison to the base price plus surcharge pricing model domestic stainless producers have supported in recent years.
"The nickel price is rising like hell but the market's not accepting it at the moment," a service center source told Platts recently, adding that "service centers and trading companies will eat their own stocks" rather than taking on material at prices incorporating current nickel prices.
A stainless mill source in Europe told Platts last week that, while in a lot of respects the base price plus surcharge model "still works very well," continued import pressure at lower effective prices was making life difficult, with base prices coming down slightly as alloy surcharges rose.
The mill source also saw destocking as the likely response to current market conditions.
"It's natural that people try to reduce their inventory," he said, adding that this was putting pressure on demand from the distribution sector.
