This has been a year of crisis for the nickel market.

 

Trading volumes in the global benchmark nickel contract on the London Metal Exchange (LME) have collapsed amid reduced trading hours, prices have swung wildly and decoupled from the physical market, and the declining share of LME-deliverable nickel in world supply and consumption has brought into question the future utility of the index as a global price reference.

 

Nickel prices traded over a range of $21,375-31,275/t in the fourth quarter of this year, with the wide spread attributed chiefly to poor liquidity, down by 40-60pc relative to the period before March's short squeeze that has exacerbated the effect of falling on-warrant inventories in LME warehouses.

 

On-warrant LME nickel stocks recently hit a 14-year low and have stayed below 50,000t for much of this year, accounting for less than two weeks of global demand to support underlying prices.

 

The LME faces a major challenge as physical trade increasingly moves on from LME-deliverable nickel to Class 2 and intermediate products, with the so-called Class 1 nickel's supply share of the global market set to drop to 20pc this year, compared with 50pc in 2012.

 

Nickel briquette constituted 17pc of raw material supply in Chinese nickel sulphate production for the electric vehicles (EVs) market this year, but its share is set to drop to 7pc in 2023 in favour of nickel matte, the use of which is set to rise from 27pc to 38pc over the same period.

 

According to Australian financial services group Macquarie, 70pc of the world's saleable nickel is currently priced lower than the LME benchmark, indicating a divergence in a market where Class 1 supply-demand fundamentals are tight but Class 2's are in surplus.

 

Prices of nickel pig iron (NPI), a Class 2 product used in stainless steel production that accounts for half of the world's nickel supply, best illustrate the decoupling. The Argus assessment for NPI min 10pc ex-works China at the beginning of the fourth quarter was at 88.4pc of LME nickel cash official price to 1,330 yuan/mtu ($19,062/t), but was last assessed at 70pc to Yn1,330/mtu ($19,993/t) on 21 December.

 

Macquarie expects both Class 1 and Class 2 nickel to be in oversupply in 2023 as consumption of Class 1 in nickel sulphate production for the EV market drops — replaced by intermediate products matte and mixed hydroxide precipitate (MHP) — with LME cash nickel prices forecast to fall to $22,500/t from an average of $24,951/t in the fourth quarter of this year. But the group sees no downside to futures prices at below the $20,000/t level either, arguing that any pressure emanating from bearish macro indications and a downturn in stainless steel demand will be outweighed by support from the rapidly expanding global EV battery market and producers' need to hedge medium-term prices.

 

Dutch investment bank ING echoes Macquarie's sentiment that $20,000/t is the floor price for nickel in 2023, but mainly because it expects the tightness in Class 1 nickel availability to continue amid an emerging overall structural surplus in the market. According to the bank, prices will be driven chiefly by the stainless steel market.

 

"We see [benchmark nickel] prices hovering at between $20,000/t and $20,500/t over the first two quarters of 2023 before gradually increasing to $21,000/t in the third quarter and $22,000/t in the fourth quarter as the global growth outlook starts to improve," ING commodities strategist Ewa Manthey said.