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With global GDP forecast to grow at just 0.3% this year, translating into a 2.8% year-on-year contraction to nickel demand, about 150,000 tonnes of surplus metal or 10% of global supply could accumulate.
Industry players including Vale, Sumitomo, Glencore and South32 have all shown concern over nickel fundamentals, prompting production responses that "should ultimately limit the supply overhang", according to the bank.
"Similar to copper, we therefore believe prices could rally, when a treatment (not necessarily a vaccine) is found or the isolation measures show success," BofA said.
The overall commodity complex has generally faced "immense headwinds" in recent weeks over the COVID-19 outbreak. Nickel has been no exception, with prices to date falling 19.6% year-on-year, despite a constructive longer-term outlook pinned to rising electric vehicle penetration.
BofA also sees inter-country dynamics between China and Indonesia not changing in the foreseeable future. There has been apprehension over the build-up of Indonesia's nickel-stainless steel supply chain.
"To that point, nickel ore prices have gradually risen in China, as Indonesia disincentivised ore exports, while nickel pig iron is no longer trading at a discount to refined nickel," the bank said.
"Going forward, we believe that availability of nickel ores, as well as domestically produced and imported NPI will increasingly cap China's stainless-steel production, potentially opening up some space for Indonesia's mills. In the end, that dynamic will however mostly affect the two Asian countries, while the impact on the Western world will be more limited."
Focus on ESG investment
BofA said the global economy, an especially the developed world, was undergoing a rapid transformation as governments tried to strike the right balance between protecting economic activity and public health.
Looking further out, a key question is how quickly authorities are willing and able to reduce their involvement in the economy. As the social and economic costs of COVID-19 become evident, anthropogenic climate change has been temporarily pushed into the background.
"Arguably, governments have not been particularly proactive in tackling the climate emergency," BofA said. "That said, as the current health crisis ends, it would be remarkable if governments around the world were not getting more forcefully involved.
"This matters for the mined commodities, which are required to decarbonise the global economy. Nickel stands to benefit from that as EVs will likely continue to gain market share.
"This implies that ESG will in all likelihood become more important, supporting the mined commodities, which are required to decarbonise the global economy."
