LONDON (Commodity Online): Price action in the nickel market has been volatile over the past month. A QE3-inspired bout of short covering supported a price surge in mid-September, followed in early October by profit-taking, fresh short positioning and subsequent downward pressure.

While fundamentals have played little role in this performance, developments in this context have also been significant this month. Ultimately, the market balance projected for the rest of 2012 and into 2013 has tightened versus previous expectations.

This is largely due to cuts in forecast mine supply. The recent closure of the Cosmos mine in Australia has resulted in a 14Kt cut from the supply outlook for 2013, which adjoins previous reductions in production expectations at several projects currently ramping up. Such downward revisions to mine supply ex-China have been the key factor behind the 2013 surplus expectation shrinking from 39Kt (July 2012) to just 10Kt this month.

A key factor limiting potential upside for LME prices is the softness in the demand picture. Despite some recent optimism about reports of increased mill activity in China and the likelihood for a higher alloy surcharge in Europe October/November, Barclays remains sceptical that either effect will trend into significantly improved stainless supply chain activity. In Europe, end-demand conditions remain extremely soft with hand-to-mouth buying predominating and evidence of generally adequate supply chain stocks denting a need for a restock at this juncture.

“In China, we believe the uptick in stainless product demand has been limited (although affecting prices given low overall volumes), higher stainless output will replenish stock levels and reverse product price gains, in turn weighing on mill margins. Until stainless activity sustainably improves, we remain skeptical of the potential upside to nickel prices above the $18,000/t level for the time being.” the Bank concluded.