LONDON, Jan 19 (Reuters) - The nickel market is experiencing its most severe squeeze in over a decade. London Metal Exchange (LME) three-month nickel has risen above $22,000-per tonne for the first time since 2012, last trading at $22,300 per tonne. The premium for cash metal rocketed to $495 per tonne on Monday, the widest it"s been since 2009. This squeeze was made in China, where the price has surged to life-of-contract highs, but has now hit the London market in full force. The common theme is one of falling inventories and a scramble for the type of nickel used in batteries for electric vehicles. So-called Class 1 metal is what"s traded and stored on both the LME and the Shanghai Futures Exchange (ShFE). The market has been collectively wrong-footed by the strength of demand from both the nascent battery sector and the stainless steel sector, which has historically dominated the metal"s usage profile. Nickel gripped by ferocious squeeze as stocks disappear Nickel gripped by ferocious squeeze as stocks disappear WILDNESS Nickel"s walk on the wild side has coincided with the LME"s third-Wednesday monthly prompt date. It"s characteristic of this quirky exchange that the monthly clash of positions plays out on the third Monday of each month, in this case Jan. 17, thanks to the LME"s rolling two-day prompt system. Sure enough, time-spreads turned white hot at the start of this week. "Tom-next" , which is the cost of rolling a position overnight, flared to $20 per tonne on Monday and to $90 on Tuesday - the last-chance saloon for holders of short positions seeking to roll their way out of danger. Short-dated time-spreads are highly sensitive to dominant long positions such as the entity which held cash-date positions in excess of 90% of available LME stocks at the close of Friday. It"s worth noting, though, that such a large position comes with lending requirements which may actually have helped ease the daily spread tightness. The LME has let it be known that it is closely monitoring the situation, which is par for course when things turn ugly. There is as yet no suggestion that the exchange will step in to limit the backwardation as it was forced to do with copper last October. And it may not have to since the spread structure shows signs of easing as nickel passes through January"s monthly prompt. The benchmark cash-to-three-months spread closed Tuesday at a backwardation of $370 per tonne, still super-tight but not as extreme as Monday"s action. However, spreads will remain volatile as long as LME inventory keeps falling, which it shows every sign of doing. DISAPPEARING STOCKS LME stocks have fallen every day since October last year, the headline figure collapsing from over 143,000 tonnes to 94,830 tonnes. A flurry of arrivals this week has failed to halt the downtrend with metal still flying out the warehouse door. This week"s squeeze has also seen metal awaiting physical load-out put back on warrant. But even after 3,192 tonnes of net "reverse cancellations", almost half of LME stocks are scheduled to depart. What remains - 47,502 tonnes - is the lowest since 2019. Nor is there any significant tonnage sitting in the LME shadows. Off-warrant stocks totalled 5,866 tonnes at the end of November, down from over 44,000 tonnes in February. Combined on- and off-warrant inventory fell by 161,000 tonnes, or 57%, over the first 11 months of 2021. Shanghai inventory has been running on empty for many months, translating into a running squeeze on the ShFE nickel contract. Last week"s total of 4,711 tonnes was the lowest since the contract was launched in 2015. Although compounded by a limited number of deliverable brands, Shanghai"s depleted inventory may be an ominous harbinger of what"s in store for the LME if metal keeps departing at its recent rate. DEMAND SHOCK Where"s all the nickel going? The market has seen an extraordinary surge in demand over the last year from both the stainless steel and battery sectors. This has generated "the most significant degree of tightening surprise in balance across the base metals in 2021", according to Goldman Sachs. ("Metals Watch: Aligned for the next leg higher," Jan. 11, 2022) The bank originally forecast the global nickel market to register a supply surplus of 49,000 tonnes last year but now estimates a deficit of 159,000 tonnes. It is expecting another smaller deficit of 30,000 tonnes this year. So too does J.P.Morgan, which projects a 40,000-tonne deficit in 2022. ("Metals Weekly", Jan. 14, 2022). While the red-hot stainless steel sector is expected to cool over the course of this year, demand from the fast-growing battery sector is only going to accelerate as the electric vehicle revolution picks up speed. J.P.Morgan analysts project nickel usage in batteries to grow by 50% year-on-year in 2022, equivalent to an extra 127,000 tonnes, taking over from stainless as the biggest driver of demand growth. A massive build-out of nickel production capacity in Indonesia should help rebalance the market but this will take time and comes with plenty of caveats given many operators are going down innovative technical processing routes to convert low-grade nickel into battery-grade metal. In the interim, battery-makers are tapping stocks of Class 1 material, which is what trades on both the Shanghai and London markets. THE GHOST OF 2007 That"s the problem with nickel, which comes in a wide spectrum of grades and qualities. Many of them, such as ferronickel, nickel matte and nickel hydroxide, are not deliverable against the LME or ShFE contracts. Production can boom but without an equivalent surge in Class 1 nickel, exchange stocks will remain under pressure. This is what happened in 2007, when LME nickel stocks slumped to below 5,000 tonnes and the price spiked to above $50,000 per tonne, unleashing structural changes in the market, first and foremost China"s rediscovery of nickel pig iron as a processing route. What had been economically unviable before 2007 became a major production stream over the ensuing decade. The ghost of 2007 will loom ever larger over this market as long as exchange inventory continues to trend lower. The opinions expressed here are those of the author, a columnist for Reuters.