The connection between physical demand fundamentals and futures price action has broken, say market participants, pointing to nickel stocks on the London Metal Exchange at an 11-year low and the benchmark cash/three-month spread in a backwardation of over $160 per tonne.
There have been unprecedented daily drawdowns of LME nickel stocks, which are at their lowest since 2008 at 102,696 tonnes on Thursday October 10, at a time when physical market demand remains suppressed yet the LME three-month nickel price remains elevated. LME nickel stocks have dropped sharply by 32.5% from 152,136 tonnes on September 30, the first of nine consecutive days of stock drawdowns, despite a deep and persistent backwardation in the cash/three-month nickel spread. The benchmark cash/three-month spread was recently trading at a $162.50 per tonne backwardation. In a typical market cycle, a wide backwardation would be expected to attract material back onto exchange. This is because a backwardation makes it more expensive for some participants to carry stock. "Nickel stocks and spreads are all over the place. The market is completely out of whack and the three-month nickel price is the most volatile out of the complex. Something...