The nickel market has been in large surplus this year and without significant production cuts will remain in alarge surplus this year, Macquarie Commodities Research advised Wednesday.

“The market is looking to China for further cuts in nickel pig iron production but this is not enough to rebalance the market and cuts outside China may well be a catalyst for a short-covering rally,” said Macquarie.

In their analysis, Macquarie observed, “Nickel remains the worst performer among the base metals this year. A large surplus between supply and demand has opened up and prices have collapsed.

“At current prices more than 40% of the industry is losing cash. Many nickel sellers are struggling to achieve the LME price,” said Macquarie commodities analysts.

“In China, nickel pig iron has been selling at large discounts to LME prices this year (up to $2,500/t at one stage although this has been narrowed to under $1,000/t in recent weeks as NPI producers have cut production).”  The analysts noted Ferronickel producers outside China have been forced to discount by $500-$700/t off LME.

To compound the situation, nickel producers have been slow to cut production and there are no reported significant cuts outside of China this year, Macquarie observed. However, production cuts in China are underway.

“There is a lot of loss-making among Australian producers and many ferronickel producers worldwide (in New Caledonia, Dominican Republic and Europe). These producers appear to be holding on, hoping that the Indonesian government may enforce a ban on nickel exports at the end of 2013, leading to a relief price rally,” the analysts advised. “No one knows what will happen in Indonesia but political sentiment in Jakarta seems to be moving towards a ban. However, port and plant stocks of nickel ore in China represent over six months of NPI production.”

Despite the supply glut, Macquarie said nickel demand globally has been relatively strong this year, thanks to booming Chinese stainless steel production. The International Nickel Study Group data for the first five months of this year reveal that nickel use was up 5.9% YoY, due mainly to a 16.7% rise YoY in Chinese use.  All other regions except Asia have shown falls in nickel demand.

“Any further rises in China will probably be at the expense of demand in the rest of the world as Chinese stainless steel producers continue to ramp up exports,” Macquarie advised.

The other concern for the nickel market is continued increases in production from new nickel projects, the analysts said. Macquarie Research estimated 2013 nickel supply will increase 4.1% this year to 1,845,000 metric tons and 3.8% next year to 1,915,000 metric tons while nickel consumption is estimated to total 1.77 million metric tons this year and 1.86 million metric tons in 2014.