Nickel supply surplus expected to continue, keeping stainless steel prices down
By Tom Stundza -- Purchasing, 11/19/2009 2:00:00 AM
Natixis commodity markets, Mitsui Bussan Commodities and other nonferrous metals analysts all forecast the nickel supply surplus will stay high through next year. So, although a global stainless steel recovery may gather momentum in 2010, the researchers believe high inventories will keep the world nickel price average under $10/lb for the third year in a row.
About 65% of the nickel mined and smelted worldwide is used to make stainless steel. Another 12–15% goes into superalloys used in aviation and aerospace applications.
Production of stainless steel used to make durable goods is expected to increase in 2010, but output of superalloys used in aerospace, industrial power and petrochemicals machinery is expected to continue declining.
Domestic use of stainless and specialty steel has fallen by 20% over the past four years to 1.5 million net tons expected in 2009. Nickel demand this year, in turn, is estimated at 1.12 million tons against production of 1.24 million tons. With some global growth in stainless production expected next year, the market analysts forecast that nickel demand in 2010 may increase to 1.22 million metric tons, falling short of 1.32 million tons of production.
Vale of Brazil, the world's second-biggest nickel producer, restarted partial production in October at Sudbury, Ontario, its largest nickel and copper unit, even as a strike there continued. The strike by the United Steelworkers that began July 1 has been having little impact on high nickel stockpiles in London Metal Exchange (LME) warehouses, the analysts suggest, since demand from stainless steel mills is so weak. That's why the analysts don't think nickel prices will spike if workers drop tools at Xstrata's Sudbury operations when their contract expires in January.
Analysts also cite disappointing demand and rising Chinese production of nickel in low-grade pig iron as some of the reasons for the growing stockpile and the downward pressure on prices. "Nickel has by far the worst fundamentals of any metals," mining strategy analyst Nick Moore at RBS Global Banking tells Reuters, which is good news for buyers. "LME inventories are at over 14-year highs, nickel in pig iron output is at full swing in China and there's a parade of new nickel mines coming on stream" in Brazil and elsewhere.
Citigroup analyst David Thurtell also cites the downward pressure on prices from high stocks, which is good news for nickel buyers. "It's a concern when you think that the strikes at Vale's operations should be taking out significant tonnages," he tells Reuters. Independent consultant Angus MacMillan doesn't anticipate a huge pick up in demand from the stainless sector so he expects stocks to continue to build in the coming months.
According to analyst Paul Gray at Goldman Sachs JBWere, "demand has suffered hugely because of lower stainless steel demand this year so nickel will remain in oversupply for the near future." He tells Bloomberg, Vale's Sudbury restart may cause nickel prices to fall in the fourth quarter below the $8/lb average of the past four months.
Buyers are already benefiting from the fact that domestic stainless steel prices have recorded large declines over the last 16 months due to weak demand. The bottom of the price cycle was reached in the second quarter but the 14% transaction price increases in the succeeding months have been much more gradual than the 84% increase off the floor for nickel prices.
Stainless steel production worldwide actually decreased in the first half by almost 27% compared to the same period of 2008. Total production for the first six months of 2009 was 10.85 million metric tons compared with 14.80 million in January–June 2008. Steep double-digit declines (ranging from 34% to 49%) were reported by the International Stainless Steel Forum (ISSF) in the Americas, Western Europe and Africa, Eastern Europe and Asia outside China. Only China reported increased production (by 5% to 4.1 million metric tons) during the first half. Stainless steel production in Asia (except China) declined by 34% to 3 million metric tons in the first half of 2009.
Western Europe and Africa both showed a 41% decrease in stainless steel production during the first six months to 2.9 million metric tons, down from 4.9 million metric tons for the first half of 2008. In the Americas region, crude stainless steel production declined by 41% to 800,000 metric tons in the first half of 2009. Production in Eastern Europe region showed a decrease of 49% to 100,000 metric tons.
Analysts at MEPS (International) suggest that stainless steel production may increase during the second half because of economic improvement worldwide. However, news reports from China suggest that stainless production slipped in September and October because of an unexpected weakening of the domestic market. Steel Business Briefing says China's leading stainless producer, Shanxi Taigang Stainless Steel, has been cutting production since August in response to weak demand and falling home-market stainless steel prices.
Chinese stainless mills Baosteel Stainless and Zhangjiagang Posco Stainless Steel also are cutting September–October production in the wake of weak demand, writes Macquarie Research. The MEPS analysts caution that such cutbacks in stainless output such as this "could lead to nickel oversupply and result in some price slippage during the final few months of 2009 in all parts of the world." They add that "a drop in nickel costs could add to the downward stainless price pressure over this period."
Nickel market looks to stay in surplus
(in thousands of metric tons)
| Production | Consumption | Suplus/Deficit | LME Price $/lb | |
| Source: International Nickel Study Group, World Bureau Metal Statistics, Mitsui Bussan Commodities |
||||
| '05 | 1.275 | 1.247 | 0.028 | 6.69 |
| '06 | 1.355 | 1.400 | -0.045 | 10.79 |
| '07 | 1.417 | 1.323 | 0.094 | 16.87 |
| '08 | 1.350 | 1.290 | 0.060 | 9.57 |
| '09 | 1.235 | 1.120 | 0.116 | 6.28 |
| '10/f | 1.317 | 1.215 | 0.102 | 8.65 |
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