Nickel Price Volatility and Short Squeeze Risks

"The risk of another short squeeze impacting the [London Metals Exchange] nickel price in the near term is present, given several factors including a dominant warrant-holding position on available LME stocks, as well as the short position held by Tsingshan," S&P Global Commodity Insights Metals and Mining Research Senior Analyst Jason Sappor said in the report.

The 2022 price forecast was based on a 78% year-on-year increase, owing to the ferocity of the March short squeeze, he added. He added, however, that the forecast was exposed to big risks including the potential for higher nickel prices to cause major demand destruction, particularly from the stainless steel sector.

Nickel price was extraordinarily volatile in March, as market worried that sanctions on historic primary producer Russia after it invaded Ukraine would include nickel exports, the report said.

“We estimate that Russia was responsible for 15.2% of global output of class 1 nickel, a primary nickel product used in the production of nickel sulfate for the manufacture of lithium-ion batteries in 2021,” Sappor added.

RuRU's coverage also announced the fallout from Russia's invasion and the subsequent sanctions on Russian financial institutions and key stakeholders had completely ceased bookings of non-essential cargo to and from Russia until further notice, according to Sappor.

"This has forced nickel consumers in these markets to avoid Russian metal and has created a rush to alternative sources of supplies with the LME three-month nickel price rising from $24,716/mt Feb. 24, the day of the invasion, to $28,919/mt March 4," he continued.

Trading Suspension

The volatility culminated on March 8 when the LME suspended trading after the three-month spot nickel price surged to an unprecedented $101,365/mt in early trading, following a close of $48,078/mt on March 7.

The suspension came into effect when it had returned to $80,000/mt as of 0815 GMT March 8, though all trades after 0000 GMT on March 8 were subsequently canceled. Sappor blamed the price increase on renewed fears about Russian nickel exports, which sparked an unprecedented short squeeze.

The short squeeze accelerated as Chinese Tsingshan Holding Group Co. tried to cover its huge short position, believed to be between 100,000 mt and 200,000 mt of metal," he added.

On March 16, trading was resumed with a pre-established daily restriction of 5%. It was subsequently raised to 8% from March 17, 12% from March 18 and 15% from March 21, having touched the lower end each day.

The first day of normal trading was March 22, but the price hit the upper 15% limit on both March 23 and March 24. Trading had returned to normal, but at low volumes.

The LME three-month spot nickel price was assessed at $32,085/mt at 1817 GMT March 31, down 2.5% on the day but 52% higher on the year.

Extreme Volatility

The LME three-month nickel price had closed in a "gaping" range of $28,159-45,590/mt since trading resumed amid super volatility, Sappor said, adding S&P Global expected the average price to jump nearly 80% on the year in 2022, although the tightness was expected to loosen up and temper the market going forward.

“We expect the LME nickel price to be highly volatile in the short term, as the global nickel market seeks to come back into balance following recent disruption,” he said.

“It is also possible that an increase in the nickel price would trigger a further extreme short squeeze, given that Tsingshan is reportedly still short in the market, while the LME data shows that a dominant 40%-50% warrant-holding position remains across available nickel stocks at the exchange,” he added.

S&P Global also raised its other price forecasts, increasing the 2023 price by $5,000/mt to $25,000/mt.

Market Surplus to Widen

S&P Global revised its global primary nickel market surplus for 2022 up to 46,000 mt from its previous estimate of 34,000 mt due to expectations that the macroeconomic impact of the Russia-Ukraine conflict would negatively impact global primary consumption, according to the report.

The forecast was also affected by S&P Global Ratings Economic Research reducing its 2022 global GDP growth projection to 3.4% as the conflict is due to dent global economic activity.

“We have yet to include any cutbacks to Russian primary nickel production in our forecasts for 2022, but expect that the Russian invasion will cause a period of dislocation for global flows of nickel,” Sappor said.

He added that the president of Norilsk Nickel, Vladimir Potanin, had recently reaffirmed market expectations that it was seeking to shift supplies it would originally have directed to Europe and the United States toward China.

“This is likely to push out material from countries like Australia that could then be redirected to the US and EU,” he said.

The market was forecast to stay in surplus up to 2025 at 57,000 mt in 2023 (up from 48,000 mt); 69,000 mt in 2024 (down from 79,000 mt); and 8,000 mt in 2025 (down from 49,000 mt).

S&P Global had earlier expected a surplus of 17,000 mt in 2026, but this was revised to a deficit of 77,000 mt, the first deficit since 160,000 mt in 2021.