LONDON- Shrinking nickel supplies following shutdowns linked to the new coronavirus and loss-making operations because of low prices are expected to offset weak demand from stainless steel mills and leave the market with only a small surplus.
This, analysts say, will support nickel prices on the London Metal Exchange, which have fallen by more than 20% since the start of the year to $11,000 a tonne, near January 2019 lows.
Sumitomo Corp's Ambatovy nickel mine in Madagascar has also been temporarily suspended.
Prices of ferronickel - an alloy of nickel and iron - are at deep discounts, up to $2,000 a tonne, below the LME price according to Macquarie, which estimates that 60% of these producers are either breaking even or losing money.
"Ferronickel production has been curtailed in the Dominican Republic, New Caledonia, Greece, Macedonia, and Kosovo so far this year," said Macquarie analyst Jim Lennon.
"The spread of COVID-19 in Indonesia has been rapid and risks of delays to new projects due to a nationwide lockdown must be growing – revisions downwards to 2020 production in Indonesia could be critical to keeping the market in balance this year."
Indonesia is a major producer of nickel pig iron. Local miners are asking the government to lift the ban on nickel ore exports to offset the drop in shipments of processed nickel.
Disruptions to transport, particularly trucking, from the coronavirus will cut supplies of scrap nickel.
On the demand side, slumping stainless steel output in the first quarter of 2020 is expected to contribute to nickel consumption contracting by 3% this year. Stainless steel mills are the largest consumers of nickel.
"Activity has been particularly challenged in China, where stainless steel production declined 6.3% year-on-year in January as mills churned out fewer tonnages, having oversupplied the market through most of 2019," BoA Securities analyst Michael Widmer said.
Widmer reckons margin pressures mean nearly 7% of global production is at risk. Some analysts expect the nickel market surplus at around 100,000 tonnes compared with global consumption estimated at around 2.4 million tonnes this year.
But the numbers may have to be recalculated and depend on the length of lockdowns and whether growth bounces or economic activity declines further.
Nickel consumption for the lithium-ion rechargeable batteries that power electric vehicles, which though not large at this stage, has also fallen alongside sliding sales in the auto sector.
This can be seen in rising stocks of nickel in LME registered warehouses, which at 228,768 tonnes compare with numbers below 70,000 tonnes in December.
Nearly 90% of those stocks are bagged briquette, which are easily crushed into small particles and dissolved in sulphuric acid to make nickel sulphate for making batteries, an industry dominated by China.
"China's government will probably assist electric vehicle sales perhaps more then they might have without the virus, through subsidies," Caspar Rawles, analyst at Benchmark Mineral Intelligence, said.
(Reporting by Pratima Desai; editing by Barbara Lewis) ((firstname.lastname@example.org; +44 207 542 5113;))