Could Nickel's Run be at an End?

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The nickel price, against many pundits expectations, has experienced a substantial rally from it’s lows on the LME. It has risen from $9,500/metric ton ($4.30/lb) at the beginning of March to $12,000/metric ton ($5.44/lb) now. The price appears to have been driven as much by sentiment as any real uptick in demand as we reported in an article last month. Producers however continue to close production. Sumitomo is closing nickel and ferro nickel production this half and may extend into the second half of the year depending on demand. Xstrata will suspend production at their Sinclair mine in Australia and Vale is delaying the start up of their Onca Puma mine in Brazil by at least one year.

Meanwhile stainless steel, the largest application taking two thirds of all nickel produced, has remained depressed with mills continuing to close production capacity. The fall in stainless demand has been nothing short of phenomenal, with production of all other metals rising prior to mid 2008. Stainless production, on the other hand, has fallen from 28,400 tons in 2006 to 27,836 tons in 2007 to 25,930 tons in 2009, a cumulative decline of 8.75%. (Figures from ISSF).

But these figures hide the reality of what has been happening. If we strip out China’s growing stainless production, we can see production for the rest of the world has fallen from 23,101 to 18,970 tons, a fall of 17.9%, and this is just to the end of 2008. Production has contracted further since then especially in Europe and North America. Nickel production has tried to keep in step but mines and processing facilities have still not closed fast enough. Consequently, nickel stocks at 114,204 tons are not far off a 14 year high. At the end of April, inventories stood at almost 35 days of demand. The only location where production has continued to rise is, you guessed it, China. China produced 51,822 tons in the first 3 months of 2009 up 37.1% from a year earlier according to Reuters even though some sources such as China’s Beijing Antaike Development is predicting a 6.25% fall in nickel consumption. The figures appear confusing. China’s stainless producers are currently reporting increased production, up to 90% capacity utilization from 60% last quarter but it could be a case of stimulus inspired optimism, similar to carbon steel production -  up but not due to demand. Stocks are rising as a result.

Our reading is we have found the bottom for nickel and stainless, but demand outside of China will remain weak. And even in China it could drop back if growth shows any signs of weakening again. China alone cannot carry the nickel market or create enough global demand for nickel to keep it north of $12,000/ton. Some commentators feel the rise is over done, driven more by speculators and traders than end user consumption. If that is the case, we could see a correction in coming weeks as speculative buying stops. Certainly if copper slips back, expect nickel to follow. The two have been in tandem this year for no reason other than speculative interest.

The only caveat is supply disruption. Although in reality there is plenty of stock around, the threat of a strike at Vale Inco’s Canadian operations could create an additional price spike, but that would be a temporary phenomenon. Even though we wouldn’t be surprised to see Vale allow a strike to develop ” if you have too much production why not blame the shut down on a strike and take benefit at your other mines from an increase in price?

–Stuart Burns

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