LME stocks grab feeds nickel's raging bull fires

LONDON (Reuters) - Where is all the nickel going?

London Metal Exchange (LME) stocks of nickel are falling at an unprecedented rate.

Another 8,898 tonnes left the exchange’s warehouse system on Tuesday, meaning stocks have slumped by almost a third in the last two weeks.

Headline inventory of 108,624 tonnes is the lowest since 2012. Strip out metal awaiting physical load-out, and “live” stocks of 49,494 tonnes are the lowest since 2008.

Disappearing stocks are adding fuel to the bull fires that were lit when Indonesia announced at the start of September it would bring forward to next year a ban on exports of nickel ore.

LME three-month nickel is trading around $17,600 per tonne, up over 60% on the start of the year in sharp contrast to the rest of the base metals, which are mostly in negative territory due to global manufacturing weakness.

The stocks exodus is now creating a rolling squeeze on the London market.

This does not reflect physical supply-chain tightness. Buyers are backing off from the high price with physical premiums imploding.

But it is clear that someone is betting big that the Indonesian ban will generate a supply hit causing real-world tightness in the not-too-distant future.

LME SQUEEZE AND COLLAPSING PREMIUMS

The super-fast decline in LME inventory is perpetuating the most acute time-spread tightness in over a decade in the London market.

The benchmark cash-to-three-months spread flexed out to backwardation of $240 per tonne earlier this month and the cash metal premium was still valued at an elevated $104 at Tuesday’s close.

The exchange’s positioning reports show a dominant long holding 40-50% of the rapidly depleting “live” stocks.

The spread tightness is supporting the elevated outright price with each daily exchange stocks report reinforcing the bull circle.

But there is no current shortage of nickel.

That much is evident from the fact that the backwardation has already sucked in almost 50,000 tonnes of metal since the start of September.

More may be on its way given the negative impact of high outright price and backwardation on physical buying.

Premiums are collapsing, with that for full-plate nickel delivered to China crashing from $140-160 per tonne over LME cash nickel in the middle of last month to a current discount of $50-100, according to Fastmarkets.

The import arbitrage window with the Chinese market has also been slammed shut.

China’s imports of refined nickel totalled 28,600 tonnes in August, the highest monthly tally in almost two years.

However, most of the flow, 20,800 tonnes, was classified as “entrepot by bonded area”, implying the metal has made it only as far as Shanghai’s bonded warehouses rather than to a mainland physical buyer.

THE COMING SUPPLY HIT

This LME stocks grab isn’t a reflection of current market dynamics but is rather about potential future market tightness resulting from the cut in the flow of Indonesian ore to China’s mainland stainless steel producers.

It is no secret in the nickel market that a Chinese company has been snapping up LME stocks.

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