Three-months nickel on LMEselect Tuesday breached $16,000/mt for the first time since April 2013 on the back of Indonesia's decision to ban the export of raw materials, including nickel ore.
The increase in nickel prices has seen the metal shift from the worst performing metal on the London Metal Exchange in 2013, to the best performing metal so far in 2014.
Three-months nickel on LMEselect has risen by around 22% this year, from a low of $13,334/mt in January to a year high of $16,230/mt in March.
David Wilson, director of metals research and strategy at Citi Research, said technical issues are supporting nickel prices from a heightened interest in the metal due to the Indonesian ban on nickel ore exports.
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"Funds went long a week ago and there was massive CTA short-covering. Nickel pig iron prices are edging up in China with physical demand also supporting primary nickel. There has also been an increase in cancelled LME warrants in Johor. Indonesia was the spark, its all on the back of the ban," Wilson said.
But the rally has surprised some as there was consensus that Indonesia would offer partial relief on an outright ban on raw material exports.
The Indonesian government has so far stuck to its commitment to the legislation, taking any losses from a drop in mineral export revenues.
But with approaching regional and national elections, potential unemployment issues in the mining sector, and a current account deficit, it remains to be seen whether the export ban will remain in place.
The ban is aimed at adding value to the country's mining sector by increasing domestic production of refined products.
The decree states that only mining companies that have submitted concrete plans for investment in downstream processing, or have contracts of work and have signed an integrity pact that affirms their investment commitment, would be able to export material after January 12, 2014.
Since the implementation of the export ban there has also been some further clarification from the Indonesian government.
A minimum processing requirement has been introduced that states that certain ores (e.g nickel, bauxite) must be be fully processed for export, while other ores (e.g copper concentrate) can be exported semi-processed.
A progressive tax system has also been implemented to prevent miners from merely exporting material with the minimum processing requirements.
The tax on currently stands at 25%, increasing to 35% in 2015 when it will then climb every six months until it hits 60% in the second half of 2016.
For a company to export material it must also hold a recommendation letter, detailing its plans for development of downstream processing.
So far nine companies have been granted export licenses in Indonesia.
US analysis and brokerage firm, Bernstein Research, says there will be an agreement allowing exports to resume so that Indonesia will be able to attain its current account deficit target of sub-3% of GDP by the end of 2014.
Although it notes that ore exports as a percentage of Indonesia's total exports are not large, a sharp reduction would put added pressure on the country's current account deficit, rupiah strength and increase unemployment.
Bernstein says China raised nickel imports from Indonesia last year and has enough inventory to maintain production of NPI for around seven months.
It expects further details to be issued on export restrictions on individual ores in coming months.
"Most market participants have been expecting some partial relief, given the Indonesian economy is still challenged with a significant current account deficit; therefore banning ore exports, losing the cash flow and risking job losses might not be a smart move for the government during election year," Bernstein said.
But JP Morgan metals analyst Natasha Kaneva does not expect any changes to the export ban ahead of elections in July and believes that the ban on nickel and bauxite ore will remain strictly enforced.
"We now view compromises and relaxations on export bans for nickel ore or bauxite as unlikely ahead of presidential elections in July and believe that relaxations have also become less likely for the post election period," Kaneva said in a research note, adding that this is fast becoming the dominant opinion in the industry.
JP Morgan notes that the Chinese stainless steel industry is likely to get around a lack of nickel ore by using more stainless scrap, increase production of "no-nickel" ferritics, and raise the share of ferro-nickel and refined nickel in its stainless melts.
But the bank is cutting its forecast for Chinese NPI production to around 340,000 mt in 2014 and just under 200,000 mt in 2015.
It notes that the loss of NPI production and the reaction of the Chinese stainless steel industry in potentially increasing the share of refined nickel in Chinese stainless melts could see nickel move into a supply deficit.
"Our base case now envisages a nickel market moving into deficit by H2 2014 and a 2015 deficit of 85,000 mt," it said, forecasting an average nickel price of $15,250/mt in 2015 and $15,750/mt in 2016.
Citi's Wilson also does not see any change to the nickel ore export ban.
"The election is unlikely to have any impact as all political parties are in support of the ban. Also on a full-year basis nickel ore exports were around 0.2% of Indonesian GDP," Wilson said.
Three-months nickel was trading at $16,171/mt on LMEselect at 1413 GMT Tuesday.
--Greg Smart, firstname.lastname@example.org
--Edited by Jeremy Lovell, email@example.com