Report blames nickel’s price woes on Chinese collateral holders

Chinese “shadow bankers” may have been scared away from using copper (and presumably other metals) as collateral after abuses of the practice were exposed in 2014, but the same tactics may again be in use, this time with primary nickel as the metal being held in deep inventory.

An online report posted by Reuters Feb. 9, 2016, describes nickel pricing trends in the context of the movement of large volumes of nickel plate from Russia to China.

In the article, Reuters reporter Andy Home says the outflow of nickel plate from Russia to China is not currently matched by the consumption of such nickel in China or the listed inventories of such plate in Shanghai Futures Exchange (SHFE) warehouses.

Observers, Home writes, conclude that “much more Russian metal has entered China than has yet shown up in SHFE warehouses” and “the consensus view is that the balance is sitting in bonded warehouses in Shanghai, where it is both available for SHFE delivery and being used as collateral in the shadow lending market.”

After metals in inventory in Qingdao, China, were discovered in 2014 to have been overextended as pledged collateral, the Chinese government was thought to have reacted by restricting the practice.

“It seems, though, that while the collateral trade has been much reduced in metals such as copper, it is still flourishing for nickel, albeit with much tighter lending and storage controls,” writes Home in his Reuters article.

The notion of large amounts of nickel “overhanging” the market has created a bearish price environment for nickel. As of Feb. 10, 2016, nickel had a cash buyer price of $8,035 per metric ton on the London Metal Exchange (LME). “Forget the troughs of the global financial crisis in 2008,” writes Home. “Nickel is now trading at levels last seen in April 2003.”

Of great concern to generators, processors and traders of nickel-bearing scrap is that the main reason for the low prices may not be tied directly to industrial supply and demand factors, but instead involves investors and speculators.