Nickel Price Forecast: The Sick Man of the LME

by Stuart Burns on April 29, 2013

Style:    Category: Inventory Stock Levels, Metal Prices, Non-ferrous Metals, Supply & Demand

Nickel holds the dubious honor of being the worst-performing base metal in 2012 with a fall of 13% since January this year, coming on top of a 6% fall in 2012, according to Nickel Investing News.

Currently the metal price is around $15,200 per metric ton cash on the LME, while stocks have rocketed 56% from 90,500 tons in 2011 to 141,700 tons in 2012, and nearly 176,000 tons today.

All that in a market estimated by the World Bureau of Metal Statistics to be only 1.7 million tons annual consumption. And bear in mind we are only talking LME stocks here, trade inventory, financing deals and particularly speculative stocks held in China add significantly to the total.

It’s not that consumption has slumped: in fact, between 2011 and 2012 it rose, according to the WBMS, from 1.671 million metric tons to 1.755 million metric tons , a respectable 5% increase. The problem is supply has risen faster.

 

Global nickel production reached an estimated 2.1 million tons in 2012, up from 1.94 million tons in 2011 and 1.59 million tons in 2010, according to data from the US Geological Survey. Macquarie Group is projecting a surplus this year of 82,000 tons, and it’s not, for once, all down to China. New nickel mines in Madagascar and New Caledonia are adding to expansion from traditional sources such as Canada.

At present there is little sign producers are voluntarily cutting back; announcements such as Norilsk Nickel’s suspension of Lake Johnson in Australia and possible suspension of Tati Nickel in Botswana due to low prices will help, but the bulk of Norilsk’s production comes from their low-cost Arctic operations, which remain profitable at current prices.

And therein lies the rub.

today's metal prices - MetalMiner IndXPainful as current prices are, enough production is still profitable for mining and refining to continue. Crucially, swing production in the form of nickel pig iron in China is still borderline at current prices, thanks to new technologies lowering the cost of production. China imported record quantities of Indonesian nickel ore in Q1 this year, up 50% on 2012, which was admittedly affected by export restrictions in Indonesia.

Nevertheless, refined nickel imports have also been strong, with the hit being taken by stainless scrap and ferro-nickel. According to Andy Home at Reuters, there are rumors that China’s State Reserves Bureau is stockpiling nickel. If that’s the case, real consumption is not even as strong as we have imagined.

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Nickel demand is driven in large part by stainless production, which in turn is not just a function of overall economic activity, but also supply chain re-stocking. Industrial production is not expected to turn around dramatically outside of emerging markets, and even within China it’s slowing. Except for possible strategic buying in China prompted by low prices, demand is not expected to make a sudden upswing there – anyway it’s well served by the domestic NPI market.

Under the circumstances, projections of a nickel price average for this year significantly above current levels may seem rather optimistic, but all the same, Morgan Stanley is projecting $17,131 per metric ton for the year and Societe Generale $18,000 per metric ton.

More capacity closures would help, but at the moment have proved few and far between.

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