The global nickel market remains in oversupply with significant production cutbacks required to rebalance fundamentals, investment bank Macquarie said in a research note Friday.
Nickel prices have seen a sharp fall in the past week as part of the broader commodity selloff and stocks on the London Metal Exchange currently stand at historically high levels.
LME warehouse stocks stood at 172,296 mt Friday, up a net 3,870 mt from Thursday, while three-month nickel on LMEselect was trading at $15,312/mt at 1105 GMT Friday down from a year high of $18,770/mt in February.
According to the latest data from the International Nickel Study Group, the market has been in a sustained surplus since 2011.
Macquarie notes that despite the surplus, nickel prices have lost their typical relationship to stocks, with prices today higher than they were in August 2012, when stocks were 50,000 mt lower.
However, the bank said that a sharp fall in the nickel price and rising open interest implies that large shorts have been put in place over the past month.
"The weakness in the nickel market is due to weak stainless steel production outside China -- production is estimated to have fallen year-on-year in Japan, Europe, Korea and Taiwan in the first three months of 2013," Macquarie said.
Primary nickel has also suffered from an increase in the amount of secondary nickel being used in the European stainless steel industry.
CHINESE NPI PRODUCTION AT HIGH LEVELS
Nickel ore exports from Indonesia and the Philippines to China for the production of nickel pig iron (NPI) has also had a negative impact on primary nickel demand.
Indonesian ore exports increased at the end of 2012 and Macquarie estimates that total ore exports to China of 43.5 million mt contained more than 450,000 mt of recoverable nickel units for potential nickel pig iron production.
Nickel ore exports from the Philippines contained another 70,000 mt, the bank estimates.
"Given that actual nickel pig iron production was around 350,000 mt, this implies stockpiling of more than 150,000 mt of nickel units. Incredibly, estimates for last year's NPI production in China still range from 290,000-370,000 mt, and forecasts for 2013 still range from 310,000-450,000 mt," Macquarie said.
The bank forecasts that Chinese NPI production will rise from 345,000 mt in 2012 to around 400,000 mt in 2013.
In addition, new nickel production ex-China is coming into the market with higher output levels than previously anticipated.
Vale's New Caledonian project produced 5,100 mt in the first quarter of 2013, while the Ambatovy project in Madagascar is on track to produce around 35,000 mt this year.
"Production is starting to ramp up at the 60,000 mt/year Koniambo ferronickel project. The Ramu nickel project in Papua New Guinea is going well, according to Highlands Pacific, and the company expects it to reach nameplate capacity of 32,000 mt/year later this year," Macquarie added.
The bank expects a nickel surplus of 82,000 mt in 2013, with supply up 5.6% year on year at 1,856,000 mt.
"From a fundamental perspective there is no reason for optimism about the nickel price in 2013 unless there are large-scale production cuts," Macquarie said.