Nickel is turning out to be the star performer of the major industrial metals so far this year.
True, the London Metal Exchange (LME) price has retreated from April's three-year high of $US16,690 a tonne as panic that US sanctions on Russia might be extended to Norilsk Nickel has dissipated.
But at a current $US14,650/tonne, LME three-month nickel is still up 16 per cent on the start of the year.
Tin, the second strongest performer among the LME base metals pack, is up by just 2 per cent.
In China, the Shanghai Futures Exchange (ShFE) contract largely ignored London's Russian jitters but has also just notched up its highest trading level in three years.
The London and Shanghai markets have been buoyed by a falling ‘visible’ inventory, which has reinforced a bullish view of the shortfall in supply.
LME stocks of nickel have fallen every month since August last year.
At 303,576 tonnes, they are down by 63,036 tonnes, or 17 per cent, on the start of 2018 and are now at their lowest level since June 2014.
Stocks registered with the ShFE closed in late May at 33,000 tonnes, their lowest level since October 2015, when the Shanghai contract was in its infancy.
Combined exchange stocks of 336,600 tonnes are now a long way off the highs above 500,000 tonnes seen during the first quarter of 2016.
This erosion of inventory reinforces the picture of a supply shortfall painted by the International Nickel Study Group (INSG).
The group forecast in April the world refined nickel market would register a shortfall of 117,000 tonnes this year.
It follows a similar-sized deficit in 2017 and marks a significant revision from the group's previous assessment in October 2017 that the deficit this year would be around 53,000 tonnes.
Key to that rethink is an upgrade of expected global consumption growth from 5 per cent to 7 per cent this year.
A core driver of that strong demand growth is nickel's traditional usage sector, stainless steel.
Global stainless steel production rose by 5.8 per cent to a record 48.1 million tonnes last year, according to the International Stainless Steel Forum (ISSF).
China is the world's largest producer of stainless steel and the country's output increased by almost 5 per cent last year.
But every other region experienced production growth as well, ranging from 1.3 per cent in Western Europe to 22 per cent in the ISSF's “others” category, which comprises Russia, Brazil, Indonesia, South Africa and South Korea.
Stainless steel production, and therefore nickel consumption, is expected to rise again this year, albeit at a slightly less stellar pace.
However, if this were just a stainless steel story, the impact on nickel's fortunes would be more muted.
Nickel production is also rising fast, particularly in Indonesia, the core supplier of nickel ore to China's nickel pig iron (NPI) sector, which is itself increasingly integrated with the country's stainless steel producers.
The part reversal of a 2014 ban on the export of unprocessed nickel ore has reinvigorated production in Indonesia.
The country's mined production jumped by 74 per cent to 345,000 tonnes in 2017 and maintained that rate of growth in the first two months of this year, according to the INSG.
China’s imports of Indonesian nickel ore accelerated to 3.3 million tonnes in the first quarter of 2018 from just 300,000 tonnes in the same period of 2017.
The resumption of this raw material flow is expected to cause a rebound in China's own nickel pig iron output as well as underpin continued growth in its offshore NPI capacity, now located in Indonesia.
If this were just a stainless steel story, in other words, the supply gap would be narrowing over the course of this year, as originally expected by the INSG in its October 2017 assessment.
However, the nickel price is no longer just a function of being an input into the stainless steel production process.
Nickel is an increasingly split market, one part oriented towards stainless and the other towards use in the super-alloys and battery sectors.
Indeed, nickel-containing batteries got their first specific mention in the INSG April forecast for having "a positive effect on nickel usage", a trend that "is expected to continue".
None of the current Indonesian production surge is going anywhere near a lithium battery. Neither nickel ore nor nickel pig iron is suitable for conversion into the form of the metal, sulfate, that is used for batteries.
Battery makers need refined metal, or what the nickel industry terms "class 1" material.
Precisely the sort of nickel that qualifies for good delivery on the LME and the Shanghai exchanges and precisely the sort of nickel that is now leaving those exchanges.
Not that the battery sector is by itself causing the run on inventories.
There are other factors in the mix, not least the decision by the world's largest nickel producer, Brazil’s Vale, to slow capacity in response to what were until very recently super-low prices.
But there is a sense the battery supply chain may be starting to stock up on what is already a key metallic input and one that is expected to gain in importance as battery makers use more nickel and less cobalt in their configurations.
Moreover, the battery story has charged investor enthusiasm ever since it burst on to the nickel scene during LME Week in October last year.
LME broker Marex Spectron estimates speculators have taken a longer-term view of upside on nickel prices.
Nickel's traditional price driver, the stainless sector, is the foundation on which the current price strength rests but the extra spice is coming from the battery sector.
There remains an underlying tension between booming production of nickel for usage by stainless steel mills and lagging output of class 1 nickel that could be used by battery makers.
But for now, old and new drivers are both pushing nickel in the same direction.
--by Andy Home, Reuters columnist.