Large-scale production cuts will help boost nickel prices, which may have bottomed out after a year of declines, but tighter supply is not expected to eliminate the glut.
Specifically, the production cuts affected nickel pig iron (NPI) and ferro nickel, both of which are used to make stainless steel, with nickel pig iron prices down more than 15 percent since the third quarter of 2022 at around $14,000 per ton.
On the London Metal Exchange (LME), nickel prices below $18,000 a tonne have plunged 45 per cent since December, but so far production cuts in LME-grade materials have not occurred.
Jim Lennon, analyst at Macquarie, estimates that more than 100,000 tonnes of nickel production has been cut so far, most of it ferric nickel.
"At an LME price of $18,000, we estimate that almost a third of companies in the sector are cash-flow negative," Lennon said, adding that further cuts were likely, particularly in new product output in China.
"A drop in LME prices below $15,000 would put another 35-40 percent of the sector in a loss position, which suggests there will be considerable support for prices, well above $15,000 and probably in the $17,000-18,000 range."
The average forecast in a recent Reuters poll is for a surplus of 200,000 tonnes in the nickel market this year and 205,000 tonnes in 2024. Global supply is expected to total about 3.3 million tonnes this year.
The surplus is due to a drop in stainless steel production, weaker-than-expected demand from electric vehicle battery makers, and rising supply from top producer Indonesia. Indonesia accounts for nearly half of global mining production.
"Given the heavy global reliance on Indonesian supplies, this could embolden Indonesia to exercise its dominance and behave like a de facto swing producer," analysts at Citi said in a note.
"That risk increases in a lower price environment. Indonesia's nickel supply also faces broader risks, including ore grade depletion, regulatory action and pressure to address ESG issues."
Indonesia revoked more than 2,000 mining licenses for various minerals, including nickel, earlier this year in an attempt to tighten regulation of the industry.
Sources said the Indonesian government may try to limit nickel ore exports by raising export taxes to help support nickel prices.
