Nickel may revisit lows on rising inventories Demand from stainless steel sector takes a significant knock

Print this page Posted on : 09-28-2007 by recycleinme.com

London Metal Exchange nickel could revisit the year’s lows seen in August, analysts said on Wednesday, as muted demand for stainless steel in fourth quarter fails to soak up growing nickel inventories.

LME nickel prices have jumped 33 per cent over the last six weeks, touching $33,100 per tonne. But analysts said that the next move of $5,000/tonne is likely to be downward, with the August low of $24,800/tonne in view.

This is because stainless steel producers, mostly in China, were hit hard by this year’s soaring nickel prices and are unlikely to return in full force, analysts said.

HIGH PRICES

Nickel, primarily used as an alloying agent in stainless steel, shot up over 70 per cent this year to top $51,800/tonne in May. Gains were then given back with interest as stainless producers cut output and cheaper alternatives such as nickel pig iron took hold.

At the same time, LME warehouses have seen massive stock inflows, now up 10-fold from the year’s lows to just under 32,000 tonnes.

Analysts see building LME stocks as evidence that nickel demand from the stainless steel sector has taken a significant knock.

“We believe that this inexorable rise largely reflects weak stainless steel markets, which have been characterized by production cuts during Q3 and substitution,” said analyst Mr. Robin Bhar of UBS. Producers have moved from high grades of stainless to ferritic grades, which have no nickel content, as well as grades with low nickel content, Mr. Bhar said.

STRONG GROWTH

Additionally, strong growth in low-nickel pig iron has further eroded market share, “although some marginal output has been cut due to the fall in nickel prices” Mr. Bhar said.

The most recent Chinese import data for nickel concentrate in the form of laterite ore showed a 25 per cent drop to 1.692 million tonnes in August, from over 2.27 mt in July.

This would support softer demand from Chinese producers, said BNP Paribas analyst Mr. David Thurtell.

“Generally speaking, the imports of laterite or have dropped away because there is a bit of an oversupply of stainless steel on the domestic market,” he said. This comes in a week with a raft of production upgrades.

Brazil’s annual nickel output is set to triple from this year, to 2,86,000 tonnes by 2011, the Brazilian Minerals Institute said this week. Brazil is the world’s seventh largest nickel producer.

Also, South Africa’s African Rainbow Minerals Ltd and Russia’s OAO Norilsk Nickel said this week they plan to extend the life of their Nkomati nickel mine by 18 years, almost quadrupling current production, while BHP Billition Ltd upgraded nickel resources at its giant Olympic Dam mine in South Australia.

‘NOT TOO FAR’

Still, with production increases not expected to ramp up until next year and later, and signs that demand in the stainless steel sector is reviving, prices aren’t expected to fall too far.

“The downside is limited to $24,000 to $25,000 /tonne for the moment, simply because you haven’t got the new production coming constream as yet,” said the Standard Bank analyst, Mr. Michael Skinner.

Indeed, Asia’s largest nickel producer, Jinchuan Group Ltd, this week again raised its domestic nickel price on stronger stainless demand, although some analysts suggested that recent LME price rises were probably also a factor.

“The markets are very aware that at some point the stainless steel consumers will start to show some more interest,” said analyst Mr. Michael Jansen of JP Morgan. “The market’s a bit worried that if we do see a pick up in demand, the 30,000 tonnes (in LME storage) won’t be enough to satisfy demand,” he said.

GLOBAL MARKET

Mr. Skinner also said that a resurgent base-metals complex is also supporting nickel prices for the moment, based on expectations of another rate cut by the US Federal Reserve.

Fresh fourth-quarter inflow from Monday next week could also help prices move higher in the very near term, analysts and traders said.

The global nickel market recorded a deficit of 13,000 tonnes during the first seven months of 2007, according to the most recent data from the World Bureau o Metal Statistics. But French producer Eramet SA, for one, has forecast a surplus in the second half of the year.

This suggests that “nickel prices are likely to be capped above $35,000 / tonne and a move back towards $25,000/ tonne appears likely,” said UBS’s Mr. Bhar.

Source : Business Line