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Nickel is the weakest performer in the London Metal Exchange (LME) base metals pack so far this year. It’s a dramatic change of fortune after last year’s bull rally.

At a current US$13,135 a tonne, London nickel is down by almost 8 per cent since the start of January and back to where it was last July, when Indonesia announced it was bringing forward a ban on the export of nickel ore from 2022 to this year.

The ban “remains a structurally bullish event,” according to analysts at Citigroup, given the flow of Indonesian ore to China accounts for around 12 per cent of global mined nickel production.

However, nickel bulls are now on the back foot as the coronavirus spreads its chilling effect on Chinese manufacturing demand.

The virus represents another unknown in an already complex set of calculations as to whether Indonesia’s ore ban will translate into a shortage of metal.

Nickel and copper have taken the hardest price hits from the coronavirus because funds were long of both coming into the new year.

Speculative positioning in the London nickel market has shifted from mega-long last September, when it represented 46 per cent of open interest, to sizable short, 10 per cent of open interest, at the start of February, according to LME broker Marex Spectron.

The viral hit to sentiment has compounded negative optics in the nickel market in the form of surging LME stocks and collapsing spread tightness.

LME-registered stocks have mushroomed from a multiyear low of 64,174 tonnes in November to a current 208,722 tonnes. Falling stocks fed last year’s bull rally and this year rising stocks have played their part in pushing prices lower.

Beyond the looking-glass world of LME stock movements, though, is a very real fear that the virus is going to hit nickel demand from China’s giant stainless steel sector.

China’s stainless output was already expected to weaken this year, with Citi forecasting a 0.4-per-cent contraction in nickel usage from the sector, which would be the first yearly decline since 2008.

Stainless stocks in China rose 40 per cent to 540,000 tonnes over the course of January, according to Argonaut Securities.

The virus and the widespread travel restrictions imposed to limit its spread are expected to accentuate both seasonal and cyclical weakness in China’s stainless sector.

The demand hit will be multiplied if China’s nickel pig iron (NPI) producers, who process Indonesian ore, are themselves forced to cut production owing to logistics challenges.

Conversely, both stainless and nickel demand will be lifted if, as widely expected, Beijing at some stage unleashes more stimulus to reinvigorate economic growth.

Nickel remains beholden to the stainless steel cycle, particularly that in China, even though its usage in lithium-ion batteries continues to excite investors.

Batteries, however, still represent a relatively small component of the metal’s usage profile.

Moreover, both battery and broader automotive supply chains have also been heavily disrupted by the coronavirus, meaning negligible short-term offset to any stainless steel sector weakness.

Batteries remain a long-term demand growth driver for nickel. Combined with the Indonesian hit on supply, it is why most analysts, including Citi, remain positive on the metal’s price prospects.

“Lost ore supply is set to drive producer cost inflation, on top of which there is room for speculative positioning to rise ahead of a 2021 refined [metal] deficit,” according to Citi, which is forecasting the price to hit US$15,000 a tonne over a six-to-12 month time horizon.

However, “nickel prices are likely to remain soft in the near term as the coronavirus pushes back a recovery in Chinese stainless output and the re-stocking of nickel/NPI units,” the bank cautions.

It’s already becoming clear that the coronavirus is going to act as an accelerator in an already volatile mix of price drivers.

Right now, the LME price is consolidating after sliding to a six-month low of US$12,510 last month. Don’t expect the pause for breath to last long.