London Metal Exchange nickel plummeted Tuesday, triggered by rising inventories and signs of further demand erosion, with further weakness expected over the near-term, said market participants.
Long liquidation and technical selling led the metal to a three-month low, with illiquid market conditions exacerbating the weakness, said a trader and analyst.
"While the fall in prices has been sharp, we expect future downside price risk on the back of easing nickel market fundamentals reflected in moderating stainless steel activity in the EU and the U.S., rising Chinese low-nickel pig iron output and rising LME stocks," said Kevin Norrish of Barclays Capital.
Stainless steel producers are the largest consumer of nickel.
Nickel prices have dropped roughly 20% since hitting an all-time high of $51,800/ton on May 9 – stocks have increased sharply over the past few weeks and are now at their highest level in more than a year, according to analysts.
On Tuesday, nickel stocks rose 42 tons to 8,922 tons, inching towards the psychologically important 10,000 ton level. Canceled warrants – or material to be drawn down at a later date – stood at 4.98% of total LME inventories Tuesday, "the lowest level for some considerable time," said Robin Bhar of UBS.
The LME's announcement last Thursday that it would amend its nickel lending guidance to prevent disorderly market activity has also added to losses.
"The trade remains very nervous after last week's intervention," said one LME trader.
The change in the rules effectively frees up more metal to the market by reducing the amount of nickel that market participants are allowed to control before they have to lend metal back to the market.
The exchange's move has effectively taken the flare out of the market, said the trader, forcing prices to retrace towards more reasonable levels.
Elsewhere, copper was under pressure due to a fall in Chinese copper cathode imports, but held above the $7,000/ton price level.
China's May imports of copper cathode and copper products fell 28% on the month to 220,561 metric tons, according to preliminary customs data. The data didn't specify how much of that total was copper cathode, but traders in China estimated imports of cathodes were around 100,000-120,000 tons, down 35%-45% from April but more than double the import volumes a year earlier.
"The extent of the import decrease is perhaps what is unsettling participants, who apparently expect to see nothing but unbridled growth coming from Chinese trade figures," said Edward Meir of Man Financial.
Also adding to copper's price fall was news Tuesday that China's CPI rose 3.4% in May, up from the 3% increase in April. The readings came in "slightly above target, fueling concerns that interest rates could be hiked once again," said Meir.
However, copper's fall should be limited as supply disruptions have been on the rise in recent weeks, with strike threats at Chilean copper miner Codelco and the Donan Ines de Collahuasi copper mine in Chile.
On Monday, steelworkers at Xstrata PLC's Canadian copper unit at its CCR refinery near Montreal launched a strike over salary increases and the company's pension plan.
Union and company representatives said Tuesday that no further negotiating sessions are scheduled as workers continue to strike.
U.S. and Chinese economic data later this week are expected to help gauge their base metal demand and inflationary trends in coming months.
U.S. producer price index data is scheduled for release Thursday and consumer price index data is scheduled for release Friday, while Chinese industrial production and fixed asset investment are expected Thursday and Friday respectively.
Zinc also followed the rest of the base metals lower due to long liquidation triggered by an increase in LME zinc stocks by 850 tons to 71,250 tons.
In other news, the LME said it would
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