Nickel Financing Seen by Macquarie ‘Hoovering Up’ Supplies

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Financing accords involving nickel are helping to absorb a glut of the metal used in stainless steel and supporting prices, according to Macquarie Group Ltd.

While $15,000 a metric ton should represent a floor this year based on fundamentals, prices are unlikely to fall below $16,000 because of the extent of financing of stockpiles, said Jim Lennon, head of commodities research at Macquarie in London. Nickel for delivery in three months fell 1.7 percent to $16,935 at 4:53 p.m. on the London Metal Exchange.

Prices slid 8.8 percent last year, the most among the six main metals traded on the LME. Supply exceeded demand by 87,000 tons in 2012, according to Barclays Plc. Stockpiles of nickel tracked by the LME reached the highest level since 2010 yesterday. Financing arrangements may be tying up as much as 30 percent of inventories, Societe Generale SA estimates.

“The surplus is being hoovered up by the financial community,” Lennon said in a phone interview on March 13. “Financing of nickel is placing a little bit of a floor for nickel prices. There seems to be now a little bit of equilibrium developing around the $16,000 to $17,000 range, simply because material is being siphoned off by the financial community.”

Market Contango

Financing transactions typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when later-dated contracts cost more than those with nearer dates. The contango’s size influences profitability, along with borrowing and storage costs. Immediate-delivery nickel traded at a discount of $67.50 a ton to three-month metal on the LME today.

Financing nickel may bring a 1.5 percent to 2 percent risk-free return, according to Macquarie. In China, high-value product nickel can be obtained with a letter of credit and used as collateral against a yuan-denominated loan, Lennon said. Most of the nickel surplus is accumulated in China and in LME-monitored warehouses, according to Macquarie.

Nickel stockpiles tracked by the LME were little changed today at 161,544 tons, exchange figures showed. Inventories climbed 15 percent this year. Orders to withdraw metal from LME warehouses, or canceled warrants, jumped 9.3 percent yesterday to 32,226 tons, the highest since at least 1997, on bookings in Rotterdam. Nickel prices gained as much as 1.8 percent yesterday to a three-week high.

‘Lackluster’ Demand

“The cancellations have yet to translate into steady outflows,” Leon Westgate, an analyst at Standard Bank Plc in London, said in a report yesterday. “As far as physical premia are concerned, the rally in prices has tended to see premia weaken, suggesting that warrant cancellations aside, real demand remains rather lackluster.”

Nickel plates for immediate delivery on the LME were offered at a premium of $62.50 a ton in Europe, the lowest surcharge since at least 2005, Metal Bulletin data showed. Some leading stainless-steel producers are reducing inventories rather than producing more metal and have less need to buy nickel, Macquarie’s Lennon said.

Refined-nickel production will rise 4.9 percent this year, outpacing usage by 81,000 tons, Barclays estimates. About 65 percent of the metal is used in stainless steel. Demand for stainless steel in China is “surprising on the upside,” helping to absorb some nickel, Lennon said.

“Chinese stainless-steel production has been a lot stronger than expected, so the demand for nickel has also been pretty strong for China,” he said. “But that won’t be enough to push the market into balance or deficit. There is a substantial surplus in the market this year and next year, in our view.”