A commodity fraud at China's Qingdao port has hit bank financing of metal deals, sparking a surprise jump in nickel exports and pushing back expectations of a global supply shortage of the metal used mainly in stainless steel.
The Chinese exports have helped global stockpiles hit record highs, confounding expectations of a deficit as soon as next year that drove a spike in nickel prices after Indonesia enforced a ban on ore exports in January.
That was part of Indonesia's ambition to retain more of its mineral wealth by building a processing industry. Investors bet that Chinese stainless steel mills would run out of feed before Indonesia's industry reached full swing, putting a rocket under prices.
"The market got quite bullish. The reason they got bullish is still there. But now they are looking at all this metal coming out of financing deals," said analyst Lachlan Shaw of Commonwealth Bank of Australia in Melbourne.
"It doesn't change the reasons for the deficit next year -essentially the ferronickel sector in China not being able to access the ore because of Indonesia's export ban," he said.
China is the world's biggest consumer of nickel.
Its stainless steel mills relied on Indonesian ore to make nickel pig iron (NPI), a cheaper substitute for refined nickel, and the result of the export ban was a 50 percent jump in nickel prices by May.
But expectations of a global deficit by next year have been upended by the funding scandal at Qingdao port, after it emerged in June that companies had used fake receipts to obtain multiple loans secured against single cargoes of metal.
Four months later the shock waves from the fraudulent commodity financing are still being felt in the markets.
Western and Chinese banks responded by clamping down on lending in China and traders are still having a hard time getting letters of credit (L/Cs) to finance nickel stocks because of the perceived risk with poorly regulated warehouses.
"We've shipped some nickel out of China. There's no demand now because it's too tough to get L/Cs after Qingdao," said a Singapore-based trader.
Chinese nickel exports jumped to more than 50,000 tons over June to August, almost double its exports in the first five months of the year, helping drive LME stocks up by about a quarter since mid-June to a record 359,166 tons.
Meanwhile, premiums to get nickel in Malaysia have slumped to around $10-15 for full plate cathode from $60-$70 in mid-August, traders said.
London Metal Exchange nickel prices have swooned by some 18 percent since Sept. 9, although at $16,200 a tonne they are still up around 16 percent in the year-to-date.
Still a deficit coming
Analysts polled by Reuters in July still expected the nickel market to swing into a 99,000 ton deficit next year.
"The run in nickel prices was never about a shortage of metal, it was about a shortage of ore. And nickel metal just isn't a good replacement for the low-quality ore that NPI producers in China need," said analyst Joel Crane of Morgan Stanley in Melbourne.
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Indonesia's nascent nickel pig iron industry is not expected to be in full swing until at least late 2016.
Analysts estimate that China's mills have enough stockpiles to last until the middle of 2015, as they have boosted imports of Philippine ore - up 26 percent in the January-August period to more than 22 million tonnes.
But some stainless steel producers could still turn to refined nickel units to help fill the gap, said analyst Stephen Briggs of BNP Paribas in London.
"Making stainless steel is like cooking - you need a certain number of nickel units and if you change one element, you have to change the proportions of the ingredients," he said.
"That's not going to happen overnight, although in the long term it can ... The adaptability of China's NPI industry has consistently been underestimated by Western commentators."