Commodities | Dec 07 2009
By Andrew Nelson
The base complex has continued to move in a positive direction, with aluminium, copper, lead and zinc all achieving double-digit percentage gains since the beginning of October. Yet at the same time nickel has fallen 7%, which raises the question: does nickel really deserve its new found position as the pariah of the complex?
Barclays Capital commodities analyst Nicholas Snowdon, for one, believes this trend simply isn’t warranted. In fact, Snowdon is predicting sustained price gains for nickel as we move into 2010.
He notes that market sentiment has been pretty much focused on LME stock builds of late. However, he feels the market simply doesn’t understand that this trend is simply a part of the wider inventory movements in nickel and a function of broader market balance. While Snowdon admits that LME nickel stocks have certainly risen sharply, up 81% so far this year, the increase is still lower in percentage terms than the rest of the complex apart from copper and zinc.
Snowdon also points out that by just focusing on LME stocks, one can’t get an accurate overall picture of the market. Thus while LME nickel might be up 64kt so far this year, reported consumer and producer stocks have fallen by 30kt and 13kt respectively. This means the net stock change so far in 2009 is a relatively small 15.2kt, which represents only a 7% increase.
To use Snowdon’s own words, “this pales in comparison to the year to date growth seen in total commercial stock levels in aluminium (35%), lead (24%) and zinc (26%).” Given this view, he believes there is little justification for nickel being singled out as the weakest and most oversupplied base metal. In fact, predicts Snowdon, as the OECD restocking cycle picks up in 1H10 and when the Russian export tax takes effect, deliveries to European warehouses should become meaningless.
However, analysts from GSJB Were aren’t quite as convinced about the upside that Barclays believes will come from a recovering OECD. The broker notes that demand for stainless steel is still weak in Europe. While the broker admits that distributor stocks aren’t that big, it sees them as being more than enough to meet current requirements. As such, the broker sees little if any fresh buying of nickel from European stainless mills, at least in the run-up to Christmas.
In fact, after a reasonably strong third quarter performance, mostly on the back of re-stocking, the broker thinks the current quarter is shaping up to be much worse for European stainless mills than most had expected. GSJB Were cites as proof Outokumpu’s inability to increase base prices as it had planned and also the confirmation from ThyssenKrupp Stainless that orders are now falling and that a market improvement is unlikely before February or March 2010 .
Not to be left out, Snowdon also has some “areas of concern”. He notes that quite a bit of mine capacity, nearly 20% in fact, remains shut. However, a good amount of that production capacity will come back on-line in 2010.
The levels of speculative stockpiling and domestic production in China also remain uncertain, making it very difficult to factor in how much impact China will have. There is meaningful domestic production that will eventually be restarted, but the current economic performance of China and the additional levels of stainless capacity due to come on-line in 2010 raise some significant questions about both supply and demand.
All up, Snowdon sees the nickel market as being close to balanced in 2010. Given the predicted recovery in Europe and US and given China’s refined import levels are expected to trend back upwards over 2010, he believes that getting near to US$20,000/t over the next year is realistic. And maybe even higher, predicts Snowdon, depending on mine performances.
