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Steel De-Stock Hanging Over Nickel Price Outlook

Commodities | Mar 16 2007

By Chris Shaw

Nickel has been a star performer among the base metals in recent months, its price spiking to more than US$20 per pound as demand from the stainless steel market has been surprisingly strong and the supply side response has been slower than anticipated.

This has led a number of brokers to lift their price forecasts for both this year and coming years, though opinion remains mixed as to the metal’s outlook. As per usual China remains a key in terms of future price direction, Merrill Lynch noting the Chinese are the biggest speculators in commodity markets so their approach in terms of how much risk they are willing to take on will be important for future prices.

With the recent volatility in markets being sparked by a fall in the Chinese equity market it appears their risk profile is becoming more defensive, but in Morgan Stanley’s view recent trading has been nothing more than a mid-cycle correction so it has retained its positive outlook for the commodity sector generally.

Merrills are somewhat more cautious on nickel though, suggesting while the longer-term outlook remains good as the market is likely to remain in deficit for as much as another five years, short-term there is likely to be a jump in supply and therefore stockpiles.

It bases this view on its assessment of the stainless steel market, which is important as 67% of nickel is used in the production of stainless. It expects prices to slide in the coming six months as a de-stocking occurs in the stainless steel market thanks to rising inventories in both Europe and the US. In addition, it notes nickel producers such as Norilsk are running higher stock levels rather than releasing the metal on to the market.

As these higher stockpiles flow through the broker expects traders to short the metal, so exacerbating the impact. Given such an outlook it suggests prices could fall as much as 30-40% over the next two quarters.

The broker recently revised up its average price forecast for this year by 29% to US$13.88/lb, though this remains well below current spot prices. It has similarly increased its longer-term forecasts, with 2008 increasing by 11% to US$10.50/lb and in 2009 by 13% to US$9.00/lb, this being close to where it expects prices to settle for the next few years thanks to the positive impact of supply constraints and delays at projects such as Ravensthorpe and Goro.

Adding to the broker’s negative outlook is the move by the Chinese to use nickel pig iron as a substitute in stainless steel. Currently this is limited to lower grade levels of stainless, but the broker notes if it can be applied to higher grades there is a potential impact of about 70,000 tonnes of additional supply, which would be a negative for prices.

Despite this the broker remains more positive on prices than is JP Morgan, which is forecasting an average price this year of US$12.70/lb, falling to US$7.03/lb in 2008. The broker’s long-term price forecast is US$4.54/lb, highlighting how far the metal could come back if things don’t run in its favour.

Smith Barney Citigroup is more aggressive with its forecast this year, estimating an average price of US$15.91 per pound. Looking beyond this year it sees prices falling sharply, to an average of US$9.25 per pound in 2008 and US$4.00 per pound long-term. Morgan Stanley is more positive, forecasting an average price of US$14.50 per pound for 2007, US$12.50 per pound in 2008 and US$6.00 per pound long-term.

While this looks negative for the metal Macquarie notes even allowing for such declines the nickel price would still be high compared to historical levels. In addition, with capital and operating costs having moved sharply higher, a long-term price of something close to its forecast of US$5.50 per pound, up from US$4.50, will be needed to make investment in new projects profitable.

Merrill Lynch prefers other sectors in the commodity sphere but Macquarie’s preference among the nickel plays is Jubilee Mines (JBM), which it rates as Outperform. Among the other nickel stocks it rates Independence Group (IGO), Mincor Resources (MCR) and Sally Mallay (SMY) as Neutral and Minara (MRE) as Underperform.

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