- Nickel consolidated higher but found overhead resistance after retracing 50 percent of the recent sell-off.
- This is a key technical rejection, followed by the break below the confirmed bear flag formation.
- The overall structure in the short term remains bearish and we cannot rule out an AB = CD move (see daily chart).
- The daily RSI has already touched the DTL and turned lower again, confirming that this is strong technical resistance.
- Meanwhile, the stochastic lines are getting set up for further price weakness – selling interest has picked up.
The Asian market is set to remain rather quiet this week, with holidays in Malaysia, Indonesia and Singapore for Hari Raya Haji and then in China and Taiwan for the mid-Autumn festival. Chinese industrial production is due tomorrow; this should offer market participants further clues on how well the world’s second-largest economy is performing. The global equity market seems to have finally got the memo that there is quite a high possibility of the US raising rates this month. The January-February sell-off after the December 2015 rate increase is fresh in the memory. Still, the equity sell-off may well be profit taking that reflects seasonal weakness rather than a market correction as many feared. After all, global central banks are in this together and have a shared interest in provide sufficient and necessary easing to maintain a cohesive global recovery.
Nickel’s net long fund position (NLFP) has been rather resilient but remains vulnerable to profit taking. After a strong run, the NLFP appears to be plateauing – perhaps money managers are reassessing their positions. The recent price weakness may prompt further liquidation and could persuade short sellers to build their positions. We await the next NLFP update for confirmation.
Shorts are concentrated in the September contract, with four entities collectively holding a minimum 35 percent of the open interest. There are three entities holding longs but only at 15 percent – this is not enough to cover if shorts roll over their positions. Tightness is showing up in the nearby spreads – the contango in the c/3s at $44.25 is down from $55.00 at the start of last week. The presence of a dominant warrant holder at 30-39 percent could tighten the spreads further if the metal is in tight hands.
A narrowing contango in the c/3s is also attracting some metal back to LME-listed warehouses. There is two-way flow, with 546 tonnes arriving and 726 tonnes of outflow but LME stocks for the year is still lower on net. They peaked at January 2016 at 450,000 tonnes and now total 367,752 tonnes while available stocks are at 245,730 tonnes. With no immediate sign of a reversal in the LME stocks, the declining trend may well provide some price support.
Regina Lopez, the environmental and natural resources secretary of the Philippines, suggested in her latest commentary that “there will absolutely be more suspensions due to environmental reasons” – 10 mines have already been suspended since the start of the audit, with the newly elected Philippine government determined to raise mining standards.
There has been some talk that Indonesia may temporarily relax its ban on the export of nickel ores for those companies that are at advanced stages of building downstream NPI capacity but that need to raise money to finance the projects. Since nickel prices have continued to rebound despite this possibility, the market does not seem to expect much to come of it. In a way, Indonesian nickel miners have already suffered more than two-and-a-half years of pain since the ban was introduced and are only now starting to benefit from exporting NPI so it seems counter-productive to turn on the ore export taps again.
Prices remain in an uptrend after nickel maintained higher highs and lows since the start of 2016. The nickel market swung to a deficit of 21,200 tonnes in the first five months of 2016, the latest INSG figures show. If this trend continues, it should underpin nickel prices and potentially set up further rallies.
But we foresee near-term price weakness due to several factors: