Is Nickel Dulling?

MINING UPTICK. According to several speakers at a Merrill Lynch conference held in September, a combination of new nickel capacity coming into use, as well as an abundance of scrap nickel and stainless scrap on the market, could keep a lid on prices for the next several years.

According to a report by the financial services company Citigroup, mining supplies of close to 100,000 metric tons could be brought online next year, which could add to the existing supply.

One of the most closely watched projects is Inco’s long-awaited Voisey Bay, project in Newfoundland.

While there may be a decline in stainless steel production, more optimistic industry observers say they feel that the cuts will be only temporary, and nickel and stainless demand should pick up much sooner than earlier expected.

While pessimists say that the new capacity will work to dampen prices, some large mining concerns view the same scenario in a much more upbeat way. In a report by Reuters, Nick Sheard, vice president of exploration for Inco, said that despite all the new capacity, he expected to see significant shortages of nickel on the market through 2009. The nickel shortage, which could be as much as 50,000 metric tons per year, will result from continued strong buying by China, which should more than make up for new mining capacity.

Several nickel traders say that with demand for nickel by China climbing by more than 50 percent during the first half of this year, the combination of nickel production, stainless scrap and inventories are unable to keep up with the strong demand.

In a presentation at the Merrill Lynch Annual Mining Conference, Peter Jones, president and COO for Toronto-based Inco, noted that during the first quarter of the year, China surpassed the United States as the largest consumer of nickel, generating about 16 percent of the world nickel demand.

Even more promising for many traders is the fact that China’s move to boost its domestic production comes at a time when it is not be able to meet its demands. Jones estimates that China’s domestic capacity will increase by around 6 million metric tons by the end of this decade, accounting for nearly 70 percent of worldwide stainless steel growth.

TEA LEAVES. Many nickel traders closely watch stainless steel markets to determine where nickel pricing is heading. According to the most recent figures from the International Stainless Steel Forum (ISSF), a Brussels-based non-profit research organization, a total of more than 12.9 million metric tons of the alloy were produced during the first half of 2005, a 5.5 percent increase from production figures for the same time last year.

This growth has come almost entirely from Asia, while production declines are likely in Europe and the U.S. In a recently published market report, Sandro Giuliani, chairman of the Bureau of International Recycling’s Stainless Steel & Special Alloys Committee, notes that presently available statistics hint that the downward trend in stainless steel production outside Asia could accelerate. This would inevitably affect nickel markets, as well.

Adding to the trend has been the increased interest in several grades of stainless steel that use smaller amounts of nickel. One area of potential concern for handlers of stainless scrap is the increased popularity of 200-series stainless steels. This grade of stainless uses far less nickel than traditional stainless.

These changes also could include a swing by some Asian buyers into a 200-series stainless steel that contains far less nickel. However, some bullish watchers feel that this is only a short-term trend and that these buyers will move back to a 300-series stainless steel containing a greater amount of nickel.

There appears to be some difference of opinion as to the impact this will have on the nickel market, with Giuliani saying that the move toward forms of stainless steel with low nickel will be balanced by an increase in the production of high-nickel super alloy.

According to Fernando Duranti, managing director of Leghe & Metalli International Srl., an Italian scrap recycling company, scrap dealers will have to segregate the 300-series stainless steel scrap from the 200-series scrap.

In his presentation during Metal Bulletin’s Nickel and Raw Materials Conference, Duranti noted that, "Sellers will have to keep [stainless scrap] segregated, because scrap dealers cannot analyze every piece of scrap that comes into their yards."

Adding to the challenge, he said that while magnetic separation can be used to sort the 300- and 400-series stainless scrap, such technology is not available in the case of the non-magnetic 200- and 300-series stainless steels.

Stainless steel mills, beset by London Metal Exchange nickel prices that hover above $15,000 per metric ton, have even begun suggesting that stainless scrap dealers stop shipping pure nickel scrap and supply more stainless scrap as a way of honoring their long-term nickel supply contracts.

Duranti said this novel idea would be a high-risk strategy for any stainless scrap trader given the high price of nickel.

Mills made the suggestion because they get better results using stainless steel scrap in their raw material blend than by using a blend of pure nickel and carbon steel scrap, Duranti said.

In his report, Giuliani further adds, "It is anticipated that this market weakness will continue for the rest of the year and that considerable production cuts will affect austenitic qualities in particular, notably among the European steelworks."

He also notes that the Chinese market, which has been locked by increases in that country’s domestic production, has witnessed a further drop in scrap demand. This has resulted in situations with surplus scrap supply in relation to mill demand—something Giuliani says, "We would have considered impossible just six months ago."

While the Chinese market holds great promise, in the short term several traders of nickel and stainless say that there is a backup of inventory levels and lower orders to Europe. This situation is helping to create bearish sentiments among some.

OTHER MARKETS. Global primary nickel demand for the 2004-2008 period is expected to increase by 3.5 percent. The improvement is almost exclusively because of China, which is forecast to increase its demand for the material by 26 percent throughout the five-year period. This increase will more than offset demand from other regions of the world, which are forecast either to be flat or to post sharp declines. Japan is expected to see demand drop by 6.5 percent, while domestic demand in the United States could fall by around 1.4 percent during the five years, according to Citigroup.