Nickel Prices Coming Supply Glut but Stocks Keep Falling

Commodity

Summary:

Nickel has been the under-performer of the London Metal Exchange (LME) base metals pack this year.

LME three-month nickel sank to a nine-month low of $20,310 per tonne last week and at a current $21,500 is now down by 31% since the start of the year.

Nickel is pricing in a looming supply glut as Indonesia builds out ever more production capacity in its race to be an electric vehicle battery metals giant.

The country's mined output grew by 48% last year and by another 41% in the first three months of this year, according to The International Nickel Study Group.

Indeed, such is the scale of the Indonesian nickel boom that the market could be in large surplus until at least 2027, Macquarie Bank analyst Jim Lennon told an industry conference in Jakarta last week.

You wouldn't know it from LME stocks, which are at their lowest since 2007 with metal still departing daily.

The supply surge hasn't yet crossed nickel's class divide and low visible inventory is still cushioning the price fall.

Low Exchange Stocks, Divergent Spreads

Another 144 tonnes of nickel were loaded out of the LME warehouse system on Tuesday, their place in the exit line taken by 132 tonnes of fresh cancellations.

LME stocks have fallen by 32% since the start of this year and currently sit at a 16-year low of 37,386 tonnes. On-warrant inventory of 34,746 tonnes is the lowest it's been since November 2019.

Shanghai Futures Exchange (SHFE) stocks dwindled to just 560 tonnes earlier this month before getting a 3,678-tonne mini-booster last week. Shanghai time-spreads have been persistently tight due to chronically low stocks and the cash premium seems finally to be drawing in metal.

London time-spreads, by contrast, are trading in super-contango territory. The benchmark cash-to-three-months period flexed out to a contango of $210 per tonne in late May and was still a wide $122 at Tuesday's close.

The spread structure complements the outright price weakness in signalling growing oversupply.

Low exchange inventory, however, signals that the surplus is still largely confined to the Class II segment of the market and hasn't yet crossed over to the high-purity Class I nickel that trades on both the LME and ShFE.

Closing The Class Divide

The INSG last month raised its expected global supply-demand surplus to 239,000 tonnes. But it noted that while market surpluses have in the past been linked to LME-deliverable Class I nickel, this year's abundance will be in Class II intermediate product and chemical forms.

Russian nickel producer Norilsk Nickel has also just raised its assessment of 2023 market surplus from 110,000 tonnes to over 200,000 tonnes in light of the pace of Indonesian production growth. It too expects most of the surplus to come in Class II form.

Nickel's class divide is expected to close as a new generation of Indonesian operators master the processing route of converting the country's relatively low-grade ore to battery-ready nickel sulphate.

Upgrading Indonesian supply to battery-quality form should reduce demand for Class I nickel, previously the material of choice for conversion to nickel sulphate.

There are signs of this already happening.

China, which is heavily invested in Indonesia's nickel sector, has been importing ever rising quantities of intermediate products such as nickel matte and pig iron.

The country's call on Class I refined metal has been falling in tandem. Net refined metal imports slumped from 256,000 tonnes in 2021 to 133,000 tonnes last year. Inbound shipments in the first four months of 2023 amounted to just 11,000 tonnes, down 82% on the same period of 2022.

The displacement effect should help loosen a tight Class I market outside of China.

Norilsk expects the Indonesian displacement effect to generate a 40,000-tonne supply surplus in the Western market over the course of the year.

Waiting For Surplus

The Class I physical supply chain is easing. Nickel briquettes in Rotterdam are currently commanding a premium over LME cash in the range of $375-600 per tonne, according to Fastmarkets.

That's a long way off last year's extreme highs of over $2,000 per tonne when the market was panicking about the potential for official sanctions on Norilsk, a major supplier of Class I nickel.

However, the European premium is still elevated by historical standards. Prior to February 2022 and the Russian invasion of Ukraine it had been trading for many months just below $200 per tonne.

Russian nickel has been hit with penal import tariffs by the United States but remains free of government sanctions. Self-sanctioning by buyers opting for other brand metal clouds the picture but the flow of Russian metal, even if down changed channels, has been an important supply stabiliser in Western markets.

Yet it is evident that refined metal is still sufficiently scarce that material is still tightly held. The last inflows to the LME warehouse network were almost a month ago.

More arrivals would vindicate the many bears in the market. Until then, though, low and falling inventory remains a point of tension within a market pricing itself for massive surplus.

Source: Reuters

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Thomas

Central Bank

South Korea's central bank warned on Thursday (June 8) that an early shift in its monetary policy stance could pile more pressure on the local currency, a risk that needs to be properly addressed.

Highly uncertain inflation, accumulated financial imbalance, and credit risks related to the real estate market are among issues that required to be considered before changes to the monetary policy, the central bank said.

"Additional rate hikes by the US Federal Reserve (Fed) or an early shift in the domestic policy stance may increase downward pressure on the local currency," the Bank of Korea (BOK) said in its quarterly monetary policy report submitted to Parliament.

The BOK held interest rates steady for a third straight meeting last month, after 300-basis-point increases in 1-1/2 years through January, but also signalled it may not be done tightening.

The current policy interest rate of 3.50%, the highest since late 2008, is at a restrictive level, slightly above the neutral range, the BOK said.

However, the central bank said the degree of restrictiveness has lessened significantly this year with a sharp fall of interest rates in local financial markets.

Volatility in the won has risen above its long-term average since early last year following the Fed's interest rate hikes and exceeded that of most other currencies since August by a significant degree, the report said.

Domestic factors such as trade deficits have recently fuelled the increased volatility, it said.

The won has weakened by 3% against the U.S. dollar so far this year, following a 6% drop in 2022, when the South Korean currency once touched its lowest level in 14 years. That compares with the U.S. Dollar index's gains of 0.4% and 8.2% so far this year and in 2022 respectively.

The BOK said uncertainty was still high over how fast inflation would ease, citing core prices that were stickier in downward direction and delayed public utility price hikes.

The real estate market remains overvalued, the central bank said, adding that a declining trend in house prices softened this year, with a rebound in mortgage loans on loosened regulations.

Source: The Edge Malaysia

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Warren Takunda

Traders' Opinions

Economic

The Turkish lira plummeted over 6% against the US dollar on June 7th, reaching a new record low of 23 lira per dollar. This marked the largest daily drop since 2021 and brought the total depreciation to more than 16% since the runoff election held on May 28th. Reports have emerged suggesting that state lenders have halted the sale of dollars, signaling a change in Turkey's market interventions aimed at curbing the demand for foreign exchange. This move comes as the country's net forex reserves slipped into negative territory for the first time since 2022.

Investors and analysts alike have attributed this sharp decline to the new economic team's decision to pull back from intervening in the currency market. Led by Mehmet Simsek, a former deputy prime minister renowned for his market-friendly policies, this team is expected to implement a more conventional economic approach. Simsek's appointment as the new finance minister has fueled investor optimism, with many betting on a return to orthodox monetary policies and a market-driven exchange rate.

Furthermore, market participants are anxiously awaiting the nomination of a new central bank governor, which will further shape Turkey's economic direction. This appointment is expected to shed light on the future monetary policy stance and the extent of the government's commitment to restoring stability to the Turkish lira.

In addition to domestic factors, the decline of the lira has been influenced by Japanese retail investors who may have triggered stop-loss orders in both the lira and yen markets. Their actions have contributed to the lira's downward spiral, adding to the existing pressure on the currency.

The recent sharp devaluation of the Turkish lira underscores the urgency for the new economic team to address the country's economic challenges. Inflationary pressures, a widening current account deficit, and geopolitical uncertainties have been weighing on Turkey's currency in recent months. Investors will be closely monitoring the steps taken by the government to stabilize the lira and restore confidence in the Turkish economy.

As the situation unfolds, market participants will be keeping a close eye on the Turkish authorities' approach to managing the currency and the broader economic reforms that are expected to follow. The decisions made by the new economic team and the central bank will likely shape Turkey's economic trajectory in the coming months.

To stay updated on all economic events of today, please check out our Economic calendar

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Devin

Forex

Turkey's lira took a 7% nosedive on Wednesday as the country's newly re-elected government appeared to be abandoning its costly 18-month strategy of keeping the currency on a tight leash by any means necessary.

Ankara has seen decades of financial market difficulties and the charts below show the challenges the lira's weakness poses for the country's new economic decision makers.

1/let it go?

A combination of a sizeable budget hole, an inflation problem and thanks to a couple of years of highly questionable policies, a puny pile of FX reserves, means that there are plenty of reasons for the lira to keep falling.

If, or where, it stops nobody really knows. Analysts at Wall Street giants like JPMorgan and Goldman Sachs and FX forwards markets all think 25 or even 30 to the dollar might be possible, which is another big lurch down even from Tuesday's record low levels.

Much will depend on whether the central bank now jacks up interest rates in the big way it has done during other bouts of turmoil, or even introduces capital controls - something the authorities in Turkey have long insisted is not on the table.

The central bank is however widely expected to get a new head in the coming days. That would almost certainly be followed almost immediately by a super-sized hike, to somewhere in the region of 25%-30% from the current 8.5%, JPMorgan predicts.

Ulrich Leuchtmann, head of FX research at Commerzbank in Frankfurt added: "This is what happens when you get an exponential move - for a long time you think nothing happens, and then all of a sudden all hell breaks loose".

2/No Gain, No Pain

A potential sharp interest rate hike could easily grind the Turkish economy to a standstill again, or even worse tip it into recession, as consumers tighten their belts and companies watch borrowing costs explode.

Some of the pain could be offset by the weaker lira spurring exports potentially adding to boost of the upcoming tourism season and the reconstruction spending in the wake of February's devastating earthquake.

"GDP in local currency terms is more at risk from a course correction on interest rates, where rate hikes rein in rampant credit growth, rather than devaluation per se," said Hasnain Malik at Tellimer.

Turkey's economy is no stranger to boom-and-bust cycles, oscillating between double-digit growth and contraction rates in recent years. In its latest spring forecast, the International Monetary Fund projected a 2.7% expansion for 2023.

3/Inflation Palpitations

A tumbling lira will fan fears over a fresh spike in inflation in the country which only last year saw it top 80%.

Data on Monday showed headline inflation dipped to below 40% although that was partly down to Erdogan providing Turks with free natural gas in the run up to the elections.

Analysts were already expecting it to climb back towards 50% before the latest currency drop and Tellimer's Malik said it might now even snap back to the peak levels of last year as both the free gas ends and the FX moves work through the system.

"It's just so inevitable," Abrdn's head of local currency emerging market debt, Kieren Curtis, said referring to the lira's slump this week.

"There is just going to be more inflation so it's difficult to say what's going to turn that without a huge hike in interest rates."

4/Accounting Problems

One of the costs Turkey now faces is covering the special lira depreciation-protected bank accounts the government and central bank set up in late 2021 to convince Turks not to convert all their money into dollars or gold.

Frank Gill, a top sovereign debt analyst at credit rating agency S&P Global, estimates that if the lira drops to around 26.5 per dollar - 20% lower than where it was after President Tayyip Erdogan's re-election on Sunday - the compensation cost would be just under 3% of GDP.

He did add however that the compensation would be paid to depositors in lira rather than dollars or euros and that bill would be split between the Treasury and Central Bank.

5/Debt Dilemma

The other big problem is that $100 billion worth debt borrowed by Turkey's governments, companies and households is in dollars or euros - loans which are now getting ever more expensive to service unless you're a company whose goods are also sold in dollars anyway.

If the debt can't be repaid, the banks that gave the loans have a problem too as their balance sheets will start sprouting holes unless they have hedged themselves accordingly.

It could have wider ramifications too. Fund managers at NinetyOne estimate that when default-threatened CCC-rated countries are excluded, Turkey accounts for approximately 60% of all "high yield" emerging market sovereign debt payments due for each of the next four years.

Source: Reuters

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Alex

Central Bank

The Bank of Canada's decision to resume raising interest rates shook global bond markets and underscored the difficult task faced by central banks as they try to slow economic activity and tamp down inflation.

Policymakers led by Governor Tiff Macklem increased the benchmark overnight rate to 4.75%, ending a pause they declared in January after Canada's economy proved surprisingly strong despite much higher borrowing costs.

The central bank said the economy is running too hot to bring inflation back to its 2% target, citing robust consumer demand for goods and services and a pickup in housing activity. But Canada's situation isn't unique — and it may be the case that other central banks, including the Federal Reserve, will have to push rates deeper into restrictive territory this time around.

"Usually what happens in Canada, nobody in the U.S. cares," Fidelity Investments portfolio manager David Wolf, a former adviser to the Bank of Canada, said on BNN Bloomberg Television. "But in this case, I think people are taking the message that maybe all of these central banks aren't as close to done as people would have thought."

The yield on 2-year U.S. Treasuries jumped as high 4.6%, while comparable Canadian government bonds now boast the highest yield since 2007. Traders briefly fully priced in a Fed hike by July.

The Bank of Canada's decision didn't include much forward-looking language, suggesting officials have jumped back into hiking mode without any certainty about where borrowing costs will ultimately end up.

And while some economists have given Macklem kudos for a quick restart, the rate move is also a tacit acknowledgment that policymakers paused prematurely. Rates are likely headed higher in Canada than previously thought necessary by most observers — and by the bank itself.

It's a vindication for economists such as Citigroup Inc.'s Veronica Clark, the first analyst in a Bloomberg survey to predict a rate hike this week. "The Bank of Canada did pause. They waited to see how the data were coming in. They were expecting activity and inflation to slow and it didn't," she said Wednesday by phone.

But by moving to the sidelines, the central bank also helped Canada's housing market find a floor and start to rebound, she said. "It's a bit of a cautionary tale for the Fed to be pausing too."

Other analysts see lessons for investors as they gauge what a potential pause in the U.S. tightening cycle might mean. Fed Chair Jerome Powell and his officials, who are now in a blackout period ahead of next week's decision, seem intent on skipping a rate increase, while explaining to the public that they're not done yet.

"We have seen two central bank surprises this week in Australia and Canada. Canaries in the coal mine?" Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said by email. "The U.S. market is coming to the realization that the Fed may surprise as well."

Source: Bloomberg

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FastBull Featured

Remarks of Officials

The U.S. economy is strong amid robust consumer spending, but some areas are slowing down, U.S. Treasury Secretary Janet Yellen said in an interview with CNBC on June 7. She expected continued progress in bringing inflation down over the next two years.

While banks may struggle with commercial real estate and face some consolidation, the financial system has ample liquidity, and, overall, banks should be able to withstand any stress.

Yellen said that inflation can subside while maintaining a strong labor market, with unemployment in the 4% range.

Yellen said that legislation to lift the debt ceiling and reduce U.S. deficits by more than $1 trillion over a decade would support the Federal Reserve's efforts to bring down inflation. Yellen evaluated the recent legislation to suspend the federal debt ceiling as a "victory" for the American people. She stressed that the current "priority" is to bring inflation down, and the government continues to support the Federal Reserve's efforts in this regard.

Yellen warned that there is a risk of a recession and a financial crisis if the inflation problem is not solved.

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Warren Takunda

Traders' Opinions

Central Bank

In a surprising move, the Bank of Canada (BoC) announced an unexpected interest rate hike, raising its target for the overnight rate by 25 basis points to 4.75%. This decision comes after two consecutive meetings where the central bank had paused its tightening campaign. The unexpected rate hike has generated significant market reactions, impacting various sectors of the Canadian economy.

Interest Rate Hike Reflects Concerns over Inflation and Demand-Supply Balance

The BoC's decision to raise interest rates indicates growing concerns about inflationary pressures and the need to bring supply and demand back into balance. With annual Consumer Price Index (CPI) reaching 4.4% in April, the first increase in ten months, and core inflation measures consistently in the 3.5-4% range, fears of inflation remaining persistently above the 2% target have intensified. The central bank aims to restore price stability for Canadians by taking a more restrictive monetary policy stance.

TSX Composite Index Experiences Volatility

The announcement of the surprise rate hike caused the S&P/TSX Composite index to pare early gains and hover slightly above the flatline at the 20,100 level. Investors were caught off guard by the central bank's decision, which marks a resumption of its tightening campaign. However, positive signals from the Canadian economy, including expanding exports in April and strong trade volumes, helped offset some of the negative sentiment. Energy producers, particularly Suncor Energy, experienced a 1.6% rise, and miners also traded sharply in the green.

Canadian Dollar Strengthens to Two-Month High

Following the BoC's surprise interest rate hike, the Canadian dollar experienced a significant boost, strengthening to 1.335 per USD, its highest level in two months. This upward movement came as a surprise to market participants who expected rates to remain steady or potentially decline. The rate hike suggests that borrowing costs in the Canadian economy were not as restrictive as previously thought. Despite the strong Canadian dollar, the BoC maintained its forecast that headline inflation would slow to 3% by the summer.

Canadian Government Bond Yields Spike

The announcement of the unexpected interest rate hike led to a surge in yields on Canadian 10-year government bonds. The yield jumped over 12 basis points, nearing a three-month high of 3.4%. The central bank's indication that it may further increase rates if necessary contributed to the rise in bond yields. The BoC expressed concerns over the persistently high levels of excess demand in the economy and the possibility of inflation remaining materially above the 2% target. The Canadian economy's stronger-than-expected Q1 performance and tight labor market further supported the case for the rate hike.

The Bank of Canada's decision to raise interest rates caught markets by surprise and triggered a range of reactions across different sectors. With inflationary pressures and excess demand persisting, the central bank aims to restore price stability and ensure a balance between supply and demand. While the rate hike caused volatility in the stock market, positive economic indicators, such as expanding exports and strong trade volumes, helped mitigate the impact. The Canadian dollar strengthened to a two-month high, and government bond yields spiked in response to the unexpected rate hike. Investors and market participants will closely monitor future developments and the central bank's approach to maintaining price stability in the Canadian economy.

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