The London Metal Exchange (LME) nickel market was last week gripped by the most acute tightness in a decade.
Time-spreads flexed into backwardation as a long-running downtrend in exchange stocks squeezed short position holders.
Falling inventory and tighter spreads are normally strong bull signals in a commodity market.
And in nickel's case they seem to tally nicely with the International Nickel Study Group's (INSG) forecast that supply will fall short of usage for the fourth successive year in 2019. The outright nickel price has fallen from a March high of $13,765 per tonne to a current $11,910
However, conspicuous by its absence is any strength in the outright nickel price, which has fallen from a March high of $13,765 per tonne to a current $11,910.
Nickel has been caught up in the broader base metals negativity caused by slowing global manufacturing activity and U.S.-China trade tensions. Chinese players also appear to have stopped buying nickel as a derivative of the rampant iron ore price.
But nickel's own dynamics are also looking increasingly muted as analysts worry about a coming soft patch in demand even as production surges.
Falling stocks, tightening spreads and a sliding price herald a period of confusing signals in the London market.
A taste of things to come?
The LME benchmark cash-to-three-months spread <CMNI0-3> flipped from a relaxed $38 per tonne contango on Friday, May 13 to a backwardation of $20 at Thursday's close.
The pressure was concentrated on the June-July spread, which ended Thursday valued at $50 backwardation, a level of tightness not seen on a front-month nickel spread in a decade, according to LME broker Marex Spectron.
This times-spread tightness seems to have been down to a localised concentration of big positions on the LME's June prompt date, particularly a dominant long holding between 20 and 30 percent of open interest.
It seems to be something of a flash squeeze. There was a marked alleviation on Friday, the cash-to-three-months spread closing at a contango of $11 per tonne and June-July this morning trading at just $25 backwardation.
But it's the second nickel spreads blow-out this year after January's brief but vicious cash-date squeeze.
And more such episodes seem inevitable, if LME stocks extend their long-running downtrend.
Registered exchange inventory has fallen from a multi-year high of 470,000 tonnes in June 2015 to 164,100 tonnes.
Moreover, a significant 37% of what's sitting in LME warehouses is earmarked for physical load-out.
Open tonnage, meaning the amount of stock available for physical settlement of LME positions, stands at just 103,344 tonnes.
A shrinking physical liquidity base is going to leave LME spreads vulnerable to the next big positional clash lying along the nickel curve.
Sliding LME stocks appear to dovetail with the INSG's assessment of underlying market dynamics.
The group is forecasting a supply-demand deficit of 84,000 tonnes this year, lower than 146,000 tonnes last year but the fourth successive year of shortfall.
However, the linkage might be deceptively neat.
Some of the metal leaving LME warehouses may well have gone to meet end-user demand but there is a robust analysts' consensus that some of it has simply been moved to statistically opaque off-market storage.
This is part of a broader trend playing out on the London exchange, which has seen the evolution of a "shadow" warehousing system as metal-holders look for cheaper non-LME storage.
The common theme is one of time-spread volatility but a lessening of any LME stocks price signal.
Moreover, the INSG's figures suggest that production growth is now outpacing consumption growth leading to a smaller expected shortfall in 2019.Registered exchange inventory has fallen from a multi-year high of 470,000 tonnes in June 2015 to 164,100 tonnes
Resurgent mine production in Indonesia, up 71% last year, is driving strong nickel pig iron (NPI) production.
China's NPI output rose by 12% in the first quarter of 2019 with total primary production also up by 12% at 175,000 tonnes, according to Helen Lau, metals and mining analyst at Argonaut Securities in Hong Kong.
The demand outlook, by contrast, is starting to look cloudier.
All about stainless
Despite all the bullish hopes pinned on future nickel usage in electric vehicles, the current reality is that demand remains defined by nickel's usage in stainless steel production.
Global stainless steel production rose by 5.5% last year and is expected to continue to grow in 2019, according to the INSG.
Within the stainless sector, nickel has been benefiting from a shift towards higher quality, higher nickel-content grades.
But analysts are bracing for a slowdown in China's stainless production run-rate, which given China's scale of production means a slowdown in global run-rates.
Stainless steel margins in China have deteriorated on falling prices, while stocks are at record high levels, according to researchers at Goldman Sachs. ("China Metal Bullets: Caught between macro and micro", May 15, 2019).
"Industry participants expect stainless steel mills to cut production in Q2, implying falling nickel demand," the bank said in a note.
Analysts at Citi agree, suggesting "we may see a stainless production cut in May", adding that outside of China demand "appears fairly soft". ("Metals Weekly", May 13, 2019).
This collective sense of coming weakness in China's giant stainless steel sector, the single biggest end-user of nickel, is also why the LME nickel price has been drifting.
Nickel bulls are facing a bear combination of macro negativity and micro sogginess.
Last week's spreads gyrations briefly halted that drift in price but nickel is once again on the back foot, struggling to hold the $12,000 level on Monday.
Stocks, meanwhile, continue their downwards march to the tune of another net 300-tonne fall.
This divergence in price and stocks trends is generating a bear-bull signals clash, accentuated by last week's sudden flip into time-spread backwardation.
Aluminium traders have gotten used to such signals confusion, a bombed-out aluminium price clashing with seemingly low stocks and rolling periods of cash tightness on the London market.
It looks as if nickel traders are going to have to get used to it as well.