Stainless demand swoon collapses nickel market
By Tom Stundza -- Purchasing, 10/8/1998 6:00:00 AM
Revised data shows that nickel consumption rose by 9.3% in 1997 to a totally unexpected 930,000 tonnes. But that was an anomaly since it signalled so much stainless steel production that the world has been glutted with specialty steel throughout 1998. That's why nickel demand now is expected to rise by just 1% (at best) this year--nowhere near the 5.5% projected earlier--to 939,000 metric tons. Even with some cutbacks planned in 1998 smelting rates and lower-than-expected first-half exports from Russia, new-metal supply in the West should still grow by 3%, to 957,000 tonnes. This expected 16,000-tonne surplus "is a clear indicator that there is too much nickel on world markets," says base metals analyst Jim Lennon at Macquarie Equities Ltd. in London.
Nickel's use reflects the fortunes of the stainless steel industry because specialty metals production accounts for about 65% of primary nickel consumption. Since there's no apparent end in sight for the global overcapacity and high mill and distributor stocks plaguing the world stainless steel market, there's little likelihood of a quick recovery in the nickel market. Analyst J. Clarence Morrison at Prudential Securities agrees that "stainless steel demand shows no signs of recovery, yet new nickel capacity still is slated to come on stream in Western Australia, and exports from Russia could grow from 1997-1998 levels."
Bahr of Brandeis (Brokers) Ltd. says the slowdown in the Asian economies and the reduced world production of austenitic stainless steel will continue to have an adverse impact on nickel consumption next year. And even Michael Sopko, CEO of Inco Ltd., the world's largest nickel producer, says that because of lower stainless steelmaking worldwide, the nickel market will be in surplus for the remainder of 1998 and most of 1999.
Bahr recently forecast that nickel on the London Metal Exchange might average $2.50/lb in 1998. However, his outlook, now considered bullish, is pinned to reduced exports from Russia, which appear unlikely since that bankrupt nation is in dire need of cash from sales of materials and goods in the West. Morgan Stanley Dean Witter analyst Wayne Atwell recently reduced his 1998 nickel forecast by 17% to $2.20/lb and slashed his 1999 forecast by 33% to $2.35.
The New York analyst says that "despite the economically poor pricing environment for nickel, almost no capacity has been idled and it appears most expansions scheduled for the next 12-24 months will be completed or started up." He projects capacity growth at 6% over the next three years with only 1% demand growth this year and next year, and just 3%-4% in the year 2000.
Economist MacMillan at Billiton Metals sees it around $2.15 this year and $2.10 in 1999. "It is difficult to envisage the emergence of a sustained rally in prices with the absence of some pretty significant supply disruptions." Analyst Morrison of Prudential, who says "nickel is a disaster," also is bearish on prices. He notes that only major start-up problems at new operations in Australia, dramatic production cutbacks in Canadian production, or an overnight recovery in Japanese use will boost prices in 1999. But he says none of these scenarios appear likely.
In North America, stainless steel demand is strong, but market growth has been absorbed by imports. The world stainless industry finds itself with high inventories, and North America has been targeted as the market of choice for excess stocks by foreign mills--even in the face of trade complaints by the U.S. and Canadian producers. Best-guess estimates suggest the 1998 average nickel price in North America will have plunged by better than 30% from 1997. Purchasing's latest forecast for U.S. spot nickel is down to a $2.23/lb average from $3.21 in 1997; for 1999, look for nickel to average no higher than $2.33/lb.
Supply/demand of refined nickel(thousand, metric tons)
1994 1995 1996 1997 1998/e 1999/f
Western production 591 654 682 692 713 735
Net imports 172 171 187 243 244 247
Net supply 763 825 869 935 957 982
Western consumption 786 896 851 930 939 948
Annual use % change 18.6 15.6 -5.0 9.3 1.0 1.0
Surplus (deficit) -23 -71 18 5 16 34
LME price ((cent)/lb) 288 374 343 320 215 200
U.S. mkt price ((cent)/lb) 285 395 351 321 223 233
(revised 8/98)SOURCE: BILLITON METALS; PURCHASING
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