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What’s Wrong With Nickel?

Commodities | Jun 18 2007

By Chris Shaw

From a price of around US$33,500 per tonne at the start of the year nickel prices rose to a level of almost US$52,000 per tonne last month, before sliding back by as much as 20% from this peak in recent weeks.

The slide in prices has seen market participants increasingly question the outlook for the metal, particularly as the last couple of months has given some signs the dynamics of the nickel market are slowly changing.

GSJB Were’s view is the changes are certainly not for the better in the medium-term as the broker last week downgraded its ratings for Australian nickel stocks. While acknowledging the call was an early one and could suffer from short-term prices being higher than expected the broker suggests it is justified as while spot prices are high the market’s fundamentals are deteriorating, meaning the risk for price is to the downside.

Credit Suisse agrees and points out even as prices have come down as much as 20% in recent weeks they remain more than double the level of a year ago, meaning the market is still somewhat overheated from its strong gains in the first few months of the year.

Merrill Lynch has reached the same conclusion but in a somewhat roundabout way as the broker has actually lifted its estimates for this year and next year to bring its forecasts closer to current spot prices, at the same time placing nickel as its least preferred metal exposure.

The broker sees a chance the price could endure a short, sharp correction in the next few months, with potential for a fall of as much as 40-50% if hedge funds rush to go short on any continuation of recent price weakness. If this occurred the broker would become more positive though as it sees solid fundamentals for the nickel market over the next few years, as does Fortis Group.

The issue for nickel is a complex one as the recent change in conditions is not a matter of just a change in supply or demand but a combination of changes on both sides of the equation.

To start, demand has slipped of late as stainless steel producers in Europe in particular have cut back on production given the increased cost of adding nickel to their product. As Credit Suisse points out, at the same time some producers have announced a move to nickel free stainless steel, which is having the effect of increasing nickel stockpiles on the LME (London Metals Exchange) as substitution for the metal becomes more common.

GSJB Were points out the latest rule changes at the LME, which are designed to prevent any collusion between major players in the nickel market, are also impacting on demand, just as the supply side picture is also being clouded.

Here China is the main culprit, as the broker notes it has lifted its output of pig iron from around 2,600 tonnes in 2005 to 32,000 tonnes last year and a forecast 90,000 tonnes this year. This is having an impact on the market’s fundamentals as it points out pig iron is now becoming a durable source of nickel rather than just an emergency supply when nickel prices are high.

As a result, the broker now sees the market as moving from a relatively balanced position this year to a surplus of around 24,000 tonnes next year and as much as 49,000 tonnes by 2010.

All the blame for the supply side response cannot be laid at the feet of China as Credit Suisse notes Australian producers will soon be able to again ship product from the Port of Esperance in WA, while Weres point out major new projects are scheduled to come on line in Australia and elsewhere during the course of 2008.

This has led the brokers to forecast prices moving lower not only across the remainder of this year but in coming years, with Credit Suisse forecasting prices in three months time of US$41,000-US$46,000 per tonne and in 12 month’s time of US$30-35,000 per tonne.

GSJB Were is similarly bearish in its forecasts, as from around US$18 per pound now the broker sees an average price in the December half of this year of US$15.17 per pound and in 2008 of US$12.85 per pound. Merrill Lynch’s new forecasts are for US$17.45c per pound this year (up from US$13.88 previously) and US$12.00 per pound next year compared to US$10.50 per pound previously.

Fortis offers some support though, suggesting the underlying strength of demand should at some point offer some price support, the group’s view being prices are unlikely to slide lower than last year’s average of US$23,000 per tonne.

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