Global crude stainless steel production increased substantially in the second quarter, and that finally has started to boost nickel purchasing by mills. More importantly, it is setting the stage for substantial increases in nickel demand—and market prices—in 2003, according to the Australian Bureau of Agriculture and Resource Economics (ABARE), that government's official commodities forecaster. Nickel forecasters at ABARE in Canberra see the 2002 world price average at $3.10-$3.15/lb, an 18-19% gain over 2001 ($2.70) and project $3.90/lb for 2003.

Most private economists and market analysts agree. The nonferrous mavens at J.P. Morgan Securities in London, who see $3.10 this year, suggest a less-bullish $3.35 for next year. "But overall, nickel is well positioned to see further price gains through the rest of the year and in 2003 as industrial activity strengthens amid global economic recovery," says analyst Nick Moore at J.P. Morgan. "The market continues to receive support from rising demand from stainless steel producers, tightening scrap supplies, and comparatively low inventory levels."

Nickel producers such as Inco Ltd. and Falconbridge Ltd., both in Toronto, suggest that a sustained pickup in world economic activity in 2003 will boost demand for stainless steel, which will lift depressed stainless steel prices and trigger a prolonged rebound in stainless steel output. And that, they say, will boost purchasing of nickel—since stainless steel uses two-thirds of the world's nickel supply.

World nickel use declined 1.5% in 2001 to 1.1 million metric tons. Weak demand was evident from such major nickel-consuming sectors as superalloys, batteries and electronic components. U.S. consumption dropped 13% to 130,000 metric tons. The International Nickel Study Group forecasts 2002 world usage will rise about 7% to 1.8 million metric tons. U.S. use is anticipated to grow 4.6% this year to 136,000 metric tons.

Looking ahead, Moore of J.P. Morgan reports "strong growth in world nickel consumption is expected in 2003 because of higher consumption by the stainless steel industry, which will require increased world nickel production. However, additional capacity in nickel production is expected to be limited in the medium term, potentially leaving the market in deficit in the next few years." He insists that world prices are expected to increase in response in 2003 as industrial activity strengthens amid global economic recovery.

Michael Wright of ELG Haniel Metals in the United Kingdom and specialty alloys committee chairman at the International Nickel Study Group, suggests that global crude stainless steel production will increase 6.1% this year to 19 million metric tons—partly because of new capacity at North American Stainless in Ohio, as well as melting capacity increases at ALZ in Belgium and AvestaPolarit in Sweden. "In the U.S., alone, significant cuts in stainless steel output have led stocks to fall to below-average levels," so the increase in 2003 production likely will push nickel demand about 6% higher to 138,000 tons, according to the ABARE report.

Nickel was the strongest-priced base metal during the first half of 2002. Spot nickel on the London Metal Exchange (LME) started the year averaging $2.66/lb and ended June at an average price of $3.24/lb, a six-month gain of 22%. Moore says: "This increase in price was fueled primarily by three things. First, speculative trading based on a general recovery in the manufacturing sector—particularly in the fabrication of stainless steel. Second, controlled exports of Russian primary nickel. And, third, a tight market for nickel scrap."

During the latest period of world economic slowdown and stainless steel recession, prices have remained in a range of $2-4/lb, with most sales for the past four years closer to the low end of that range. "However, since stainless steel scrap availability in 2003 is unlikely to meet the projected increase in production, mills will have to use more nickel," says Wright of the International Nickel Study Group. "And there will be pressure to boost prices to the high end of that range in 2003." The last time the annual LME average for nickel exceeded $4 was in 1990.