The capitulation on nickel is understandable. Weak stainless steel demand compounded by de-stocking in a traditional restocking period, combined with growing uncertainty over Philippine ore exports have undermined the bull case.
Deutsche Bank continues to believe that Chinese nickel pig iron production will decrease as high ore stocks are depleted. However, even if production rates stay higher than anticipated, the current price environment means that 40% of the industry is underwater.
Deutsche Bank estimates that the marginal NPI cash cost is c.USD16,000 a ton, which is a more sustainable price in their view, and represents 30% upside from current levels.
Nickel is the worst performing base metal, down 17% since the beginning of the year. This is in contrast to the other base metals which are down between 1 to 5%, and lead which is up c.3%.
Although Chinese demand has been weak across the board, the recent (widely expected) imposition of an import tariff on imported stainless steel by the European Commission has been a further significant drag on nickel.
The 25% rate was also higher than expected. Chinese stainless steel production was down 16% year on year for February, and although the production increases in other regions should compensate, the short-term de-stocking is creating volatility in the short-term.
Furthermore, Deutsche Bank thinks investors have given up on the bull case in nickel, as Chinese port ore stocks have remained high and LME inventories have yet to show any signs of declining.