LONDON – While the fog of the trade war clouds the outlook for most commodities, battle lines are being drawn in the nickel market.

On either side, traders and investors are lining up to bet on two diametrically opposed paths for prices. The catalyst: Indonesia’s surprise move in late August to bring forward a ban on exports of unrefined ore. That’s set up conditions for a supply shortage, which triggered a rush to pull inventory out of warehouses. Freely available stockpiles on the London Metal Exchange are now the lowest in more than 12 years.

On one side, some traders are betting this is the start of a long-term, structural deficit that will propel prices sharply higher. Others argue there’s plenty of nickel available in the wider physical market and the market is about to nosedive.

“The Chinese speculative community is trading this from the short side,” said Ingrid Sternby, a commodities strategist at Valent Asset Management, in an interview in London. “Talking to our network of contacts in the market leads us to the conclusion that the nickel price doesn’t belong up here.”

As the metals industry gathers in London for LME Week, the nickel market will be one of the main topics of conversation. Here’s what you need to know:

Inventory is disappearing...

Tsingshan Holding Group Co, the world’s largest stainless steelmaker, has been a major driving force behind the sharp draw down in exchange inventories. The company has said it’s making preparations and expects tight conditions in the nickel pig-iron market next year.

...but maybe that’s not the full story?

There have already been some substantial deliveries into LME warehouses, prompting analysts to warn that the wider market isn’t as tight as some might think.

In early October, cash contracts traded at the biggest premium to futures in more than a decade, but the market structure has since reversed. The loosening is widely viewed as a sign that the squeeze on spot supplies may be drawing to a close and prices may be about to turn sharply lower.

Speculators are getting in on the action too.

Short-term traders piled in after nickel rallied about 40% over July and August. With prices now on the retreat, the selloff could gain momentum quickly as they unwind and then reverse their positions, according to George Daniel, a portfolio manager for the Red Kite Trinity fund.

If it turns out that there’s plenty of nickel available, "the happier people will be short,” he said.

With prices now down about 10% from a peak seen in September, momentum-based funds are increasingly holding neutral or bearish positions, potentially removing a pillar of support.

Eleven out of 14 momentum-based nickel trading strategies tracked by R.J. O’Brien are now short. Most switched in mid-October as the price dropped through a short-term moving average, according to the brokerage’s head of metals, Keith Wildie.