(Corrects date to October 2008 in paragraph 4)
By Andy Home
LONDON, Sept 3 (Reuters) - On the London Metal Exchange (LME) benchmark nickel for three-month delivery is currently trading around $10,000 per tonne.
Which, as with all the other industrial metals traded on the LME, is the lowest it has been since the Global Financial Crisis in 2008-2009.
But whereas the likes of copper and aluminium are still comfortably above the troughs recorded during the worst of the manufacturing meltdown that followed the financial meltdown, nickel is actually there.
Nickel hit a low of $9,100 during its "flash crash" of Aug. 12, within spitting distance of the low of $8,850 recorded in October 2008, the month after the fateful "Lehman Moment".
It's an extraordinary outcome for a metal which, unlike most of the rest of the LME complex, is experiencing both a structural tightening of supply and a growing number of price-related supply hits.
So is nickel the victim of irrational fear and panic, a collateral casualty of the financial volatility that has rippled out from collapsing Chinese stock markets?
Or are there good reasons for it treading the same ground as during the last period of global market disorder?
Graphic on long-term nickel price and stocks:
One key difference between now and then is the level of stocks, or at least visible stocks, hanging over the market.
When nickel recorded that historic low back in October 2008 LME nickel stocks stood at 57,000 tonnes.
By January 2010, following one of the most severe manufacturing collapses in living memory, they had risen to 166,000 tonnes.
Compare and contrast with the recent June peak of 465,564 tonnes of exchange-registered inventory. It should almost go without saying that this was an all-time high.
Unsurprisingly, such a huge overhang of metal was already pressuring prices ever lower even before the Shanghai stock market went into free fall.
Where did all the stocks come from?
Well, a lot of them came from China, flushed out of the shadow financing trade by the Qingdao port scandal and the resulting mass movement of metal to safe-haven storage.
Between June 2014, when the allegations of multiple pledging of metal in Qingdao first started making the headlines, and March this year China exported 100,000 tonnes of refined nickel. That was more than was notched up over the previous two years and sufficient to turn the country into a net exporter for the first time since at least 2002.
But rising inventory also reflected two other drivers more rooted in the nickel market's fundamentals.
The first was surging production. Refined nickel output grew at an average pace of close to 11 percent per year in the 2011-2013 period, according to the International Nickel Study Group (INSG).
And that's not including China's vast nickel pig iron (NPI) sector, which by definition doesn't produce refined metal but rather an intermediate product that can be fed directly into stainless steel furnaces.
It was with hindsight a classic case of commodity bad timing, a new generation of plants planned during the boom years of 2006-2007 finally making it into production, often after protracted overruns.
Such a supply surge was always going to be a test of whether demand could absorb all this extra metal.
Graphic on Chinese stainless steel production:
Cue the second bit of commodity market bad timing.
While the broader markets fret about slowing industrial activity in China, nickel arguably has experienced its own Chinese "hard landing".
China's output of stainless steel, the largest first-stage usage sector for nickel, fell by 1.4 percent in the first quarter of this year.
Which doesn't sound like a big deal at all, until you consider that prior to this year Chinese stainless steel production had been rising at a double-digit pace, 14 percent in 2014 and 18 percent in 2013.
This is only partly related to the broader Chinese slowdown story. An extra headwind for China's stainless producers has come from trade sanctions, particularly those implemented by the European Union.
Chinese stainless producers, like their carbon steel and aluminium counterparts, had been exporting their way out of domestic market weakness.
However, while carbon steel producers can switch alloying mixes and aluminium producers shift product mixes to navigate a growing list of trade sanctions, stainless mills seem to have hit a hard wall.
Exports of carbon steel have carried on booming despite a growing number of trade sanctions. Those of stainless steel have fallen by 21 percent so far this year, according to analysts at Jefferies.
"Due to the smaller size and more niche product qualities of stainless steel, we believe proof is mounting that protectionist policy can have a more substantive impact on stainless than carbon steel markets," they argue. ("European Steel, Export Your Problems Away", Aug. 24 2015)
So, record high stocks after a period of super-fast production growth, a "hard landing" in usage from the Chinese stainless sector and a broader global stainless destocking cycle and you get a plausible explanation as to why nickel is back traipsing over chart territory last seen in 2008-2009.
The demand shock may not be as severe as during the Global Financial Crisis but the other parts of the fundamental picture, particularly those huge stocks, are arguably more price-negative than they were then.
The irony is that nickel's supply-demand dynamics really are tightening.
The Indonesian nickel ban has been in place for 21 months now, stopping the flow of the nickel ore that feeds Chinese NPI producers. Stocks of ore, particularly the high-grade ore that other countries such as the Philippines can't replace, are fast running out.
Just about every Chinese NPI producer and a good many non-Chinese conventional producers have operating costs above current prices.
Jim Lennon, analyst at Macquarie Bank, told the Reuters Base Metals Forum last month he estimated 65-70 percent of nickel supply is currently losing money.
And the supply response is building. Australian miner Mincor said it will slash production over the second half of this year, while Mirabela Nickel said it has slowed activity at its Brazilian mine.
Small Canadian producer First Nickel, which was already winding down operations due to low prices, has just gone into administration.
Traders report a steady tightening in stainless scrap and ferronickel, both parts of the nickel market that exist beyond the light of exchange trading.
None of which is reflected in prices at their current distressed levels.
Right now demand woes and fear of more to come are the overriding theme for nickel and just about every other commodity.
But while the talk in other markets is all about cost curve support and potential price-related closures, nickel is already there.
Nickel supply has been tightening ever since Indonesia cut off nickel ore supplies to China back in January 2014 and the list of price-related closures is lengthening.
This market has a reputation for preempting broader metal market trends. Remember it hit its "supercycle" peak in 2007, four years before copper.
So if you're looking for a turning point in the current cycle of metallic doom and gloom, keep an eye on apparently bombed-out nickel.
Editing by David Evans