Nickel prices outperformed our expectations last month in settling at a daily average price of $19,520 per tonne, the highest price in six months, accelerating on an upward trend recorded since the January low. By way of comparison, we had predicted just $17,099 per tonne back in March – an accuracy rating of 88% – and last month, we only upwardly revised the May settlement forecast to over $18,000 per tonne. Although we have correctly expected prices to revive from their below $16,000 per tonne lows at the start of the year, it initially took time for fundamental changes to take place to support prices, making our own target forecasts more bearish than they should have been. In addition, unexpected upstream supply disruptions as a result of civil unrest in New Caledonia in mid-May gave immediate but short-lived support to nickel prices.

The May pricing environment, in our opinion, is unlikely to be sustained in the short term given that formerly unprofitable operations are now considered cash positive and so we have not upwardly revised our forecasts for the second quarter or indeed the rest of the year. This means that in June, we predict prices will correct back below $18,000 per tonne, before upside risks return in the second half when even European market participants are at least hopeful that demand conditions will improve although regional elections and windfall taxes are causing problems for oil and gas producers in the region that rely on nickel intensive stainless and superalloys.

Market fundamentals have clearly been tightening, according to latest estimates from the International Nickel Study Group (INSG). As of March 2024, the group believes the primary nickel market, which includes class 1 and class 2 finished products and excludes ores and intermediates, such as nickel matte, returned to deficit for the first time in a year and to the lowest (tightest) level since April 2022 at the height of the nickel market spike following Russia’s invasion of Ukraine.

Indonesian nickel production, meanwhile, has remained firm in the first quarter, only dropping by 1% quarter on quarter, despite the cited impact of delays in mining license renewals. Indonesia has issued an annual nickel ore output quota of around 240 million metric tonnes for the next three years, according to Reuters, citing Energy and Mineral Resources Minister Arifin Tasrif. 

Countries where nickel supply cuts have been particularly dramatic are in places where smelting and refining costs are severe, such as in Madagascar and Brazil where supply of nickel dropped by 31% and 19% in 1Q24 quarter on quarter. Elsewhere, the supply from New Caledonia also posted a 28% decline from last quarter as political issues are also impacting supply. Politics may also be the cause of cutbacks in Russia, the world’s lowest-cost producer, where production has fallen by a third. 

Interestingly, while we have been expecting the market would eventually tighten as a result of reduced production caused by the low and highly unprofitable price levels at the start of the year, demand strength has also had a part to play. In the first quarter, demand fell just 1% quarter on quarter, which is marginal for the time of year, whereas production fell by a greater than usual 7%. This narrowed the market surplus from a downwardly revised 70,000 tonnes in 4Q 2023 to just 21,000 tonnes in 1Q 2024, the tightest the market has been since the deficits of two years ago (figure 1). In our previous quarterly report, the surplus had been reported at close to 100,000 tonnes in 4Q 2023 and after a slack start to the year, we wrongly predicted the surplus would rise further in 1Q 2024 before falling hard.

On a year-on-year basis, the nickel market continues to advance strongly despite ongoing demand-side concerns within Europe, where stainless steel producers, contrary to their carbon steel peers, are still being forced to cut production because of rising import pressures but more importantly because of strikes in key hubs of Finland and Spain. Acerinox, Spain’s largest stainless-steel producer, reported that the 15% cut in output year on year in the first quarter across their global operations was entirely to do with a Spanish strike. In fact, in other markets where the company produces, including the US (North American Stainless) and South Africa (Columbus), output has been increasing, although the company has now decided to cease operations in Malaysia, at Bahru Stainless, given the oversupply situation emanating from Indonesia in particular.

Nickel consumers in Indonesia are especially sensitive to price, believing that to stimulate demand in battery raw material applications, metal prices need to fall back toward $18,000 per tonne. The evidence for this seems clear as demand for nickel in Indonesia has in fact been recovering strongly so far this year, amid a far lower pricing environment than in 2023. We also notice – albeit common to all so-called base metals such as copper – that nickel prices have been softening since the middle of May and although macroeconomic factors have had their part to play, we believe that a revival in nickel supply is also under way and threatens to rebalance the market and ensure prices fall through June.

We have decided to leave our annual balance forecasts unchanged and continue to forecast that the surplus this year will drop significantly to approximately 60,000 to 65,000 tonnes from 240,000 tonnes in 2023 (figure 2). Rather than see a steady tightening in the balance through the year, after a large surplus at the start, much of the cutbacks have already been seen and amid a higher pricing environment, supplies are likely to recover.