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The nickel market is experiencing its most severe squeeze in over a decade.

London Metal Exchange (LME) three-month nickel on Thursday reached above US$24,000-per tonne for the first time since 2011.

There’s a squeeze going on for physical delivery of the metal. And that squeeze was made in China, where the price has surged to life-of-contract highs, but has now hit the London market in full force.

The common theme is one of falling inventories and a scramble for the type of nickel used in batteries for electric vehicles. So-called Class 1 metal is what’s traded and stored on both the LME and the Shanghai Futures Exchange (ShFE).

The market has been collectively wrong-footed by the strength of demand from both the nascent battery sector and the stainless steel sector, which has historically dominated the metal’s usage profile.

LME stocks have fallen every day since October last year, the headline figure collapsing from over 143,000 tonnes to 94,830 tonnes.

A flurry of arrivals this week has failed to halt the downtrend with metal still flying out the warehouse door.

Shanghai inventory has been running on empty for many months, translating into a running squeeze on the ShFE nickel contract. Last week’s total of 4,711 tonnes was the lowest since the contract was launched in 2015.

Although compounded by a limited number of deliverable brands, Shanghai’s depleted inventory may be an ominous harbinger of what’s in store for the LME if metal keeps departing at its recent rate.

Where’s all the nickel going?

The market has seen an extraordinary surge in demand over the last year from both the stainless steel and battery sectors.

This has generated “the most significant degree of tightening surprise in balance across the base metals in 2021,” according to Goldman Sachs.

The bank originally forecast the global nickel market to register a supply surplus of 49,000 tonnes last year but now estimates a deficit of 159,000 tonnes.

It is expecting another smaller deficit of 30,000 tonnes this year.

So too does J.P.Morgan, which projects a 40,000-tonne deficit in 2022.

While the red-hot stainless steel sector is expected to cool over the course of this year, demand from the fast-growing battery sector is only going to accelerate as the electric vehicle revolution picks up speed.

J.P.Morgan analysts project nickel usage in batteries to grow by 50% year-on-year in 2022, equivalent to an extra 127,000 tonnes, taking over from stainless as the biggest driver of demand growth.

A massive build-out of nickel production capacity in Indonesia should help rebalance the market but this will take time and comes with plenty of caveats given many operators are going down innovative technical processing routes to convert low-grade nickel into battery-grade metal.

In the interim, battery-makers are tapping stocks of Class 1 material, which is what trades on both the Shanghai and London markets.

That’s the problem with nickel, which comes in a wide spectrum of grades and qualities.

Many of them, such as ferronickel, nickel matte and nickel hydroxide, are not deliverable against the LME or ShFE contracts.

Production can boom but without an equivalent surge in Class 1 nickel, exchange stocks will remain under pressure.

This is what happened in 2007, when LME nickel stocks slumped to below 5,000 tonnes and the price spiked to above $50,000 per tonne, unleashing structural changes in the market, first and foremost China’s rediscovery of nickel pig iron as a processing route. What had been economically unviable before 2007 became a major production stream over the ensuing decade.

The ghost of 2007 will loom ever larger over this market as long as exchange inventory continues to trend lower.

Meanwhile, there was another factor buoying the metal on Thursday: the European Union and the United States threatened sanctions if Moscow attacks Ukraine. Traders said the potential for this sparked supply concerns as Russia is a major producer of nickel, aluminum and palladium.

Sanctions would “further exacerbate supply shortages at a time when the European consumer has been evident on every single price dip, said Alastair Munro at broker Marex, in reference to aluminum.

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