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Commodities

China's stainless steel glut a new headwind for nickel

Expected monetary tightening also bodes ill for the source metal

China's demand for stainless steel is slowing.

TOKYO -- International nickel prices have remained soft in recent months, with the price of the metal for three-month delivery on the London Metal Exchange down 20% to around $8,900 per ton from its most recent high reached in late February.

Although the main drivers of the nickel market during the past year have been events in big supplier countries, China is emerging as a key demand-side factor driving down the market.

Market insiders' perception in May was that the nickel situation had turned for the better. Indonesia officially decided to abolish an export ban on nickel ore that had been in place since 2014, and a minister critical of nickel mine development in the Philippines -- the world's largest producer -- was removed.

These two factors led to the perception that nickel prices had "stabilized in the direction of the supply side" after a year of instability, according to a Tokyo trading house insider. Many market insiders then expected demand would steadily grow, led by Chinese demand, and the market would turn to a gradual ascent.

However, China's demand for stainless steel, used in kitchen equipment and construction materials, recently began slowing, affecting nickel demand. Nickel is a key ingredient in stainless steel.

Manufacturers began increasing stainless steel output last year in response to brisk demand for infrastructure, but supply appears to have grown while demand weakened, according to the Tokyo trading house insider.

According to China's state-run research company, Custeel.com, the country's crude stainless steel output in May totaled 1.78 million tons, down 5.69% from the previous month.

Now stainless prices have turned south. The benchmark price for nickel-containing SUS 304 stainless steel sheet currently sits around $2,000 per ton in Hong Kong, about 10% lower than in May.

"The slower demand for stainless steel reflects lackluster growth in China's real estate market," said Yoshikazu Watanabe, president of Japanese consultancy Tsukushi Shigen Konsaru.

According to the National Bureau of Statistics of China, the country's infrastructure-related investment from January to May grew 20.9% from a year earlier. But average growth for the five months was off 2.4 percentage points from January-April growth. In addition, real-estate investment in the January-May period grew 8.8%,  an average 0.5 percentage point slower than the same comparison period.

The Chinese government is seen as having grown more vigilant about signs of a property bubble. Monetary policy is expected to be tightened after fall's National Congress of the Chinese Communist Party. The move would be made to cool the real estate market. If infrastructure and real estate investment then slows, the stainless steel and the nickel markets could renew their lows.

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