Looking For A Base

When talking about volatility in metals markets, nickel seems to stand far above most other types of metal. The term "irrational exuberance" could have been used in reference to nickel markets during the previous year. However, throughout the past several quarters, prices have undergone a rather significant correction, and the sense some handlers of the material are expressing is that the metal has overcompensated on the downside.

A number of dealers in nickel and stainless are asking if the market is primed for an upswing during the first half of next year. The sense is that nickel and stainless steel markets bottomed out in the late spring of 2007.

One handler of the metal says there are a number of reasons to remain optimistic about escalating nickel prices. One key reason is that stainless steel, the primary end market for nickel, has been beaten down so far that there is inevitably going to be a return in pricing. "Destocking is down to a manageable level," he says. "During the end of the year, steel mills typically reduce inventories."

While the ability to work off inventories has kept prices biased toward the lower end of the pricing spectrum through the back half of 2007, some nickel dealers see a return to an upbeat market in 2008.

Leading the way, Asia saw stainless steel production climb by 20 percent during the first six months of 2007, and Central and Eastern Europe increased their production levels by 13.2 percent. However, stainless steel production in Western Europe declined by 3.1 percent, while North and South America experienced a 2.1 percent decline in production for the first six months of the year.

For the second half of the year, stainless steel production is forecast to increase by 6.8 percent in Asia and by 10.2 percent in Central and Eastern Europe. However, production is forecast to drop by 5.5 percent in Western Europe and Africa and by 6.8 percent in the Americas.

During the Bureau of International Recycling (BIR) Autumn Roundtable, it was noted that global stainless steel production should reach around 28.6 million metric tons this year, roughly the same figure as posted the prior year. However, the total is down from an earlier production forecast of between 30 million to 31 million metric tons.

This sentiment was expressed during a presentation given by a representative of Outokumpu, a large stainless steel producer based in Espoo, Finland. During the presentation, given in late October, the company noted that demand for stainless steel was expected to remain robust, with the highest growth slated to occur outside Europe and North America, with a special watch in India and China.

According to the company’s research, stainless steel demand is expected to increase, from 21 million metric tons in 2005 to between 30 million to 33 million metric tons in 2012.

A key reason for the position of nickel, notably primary nickel, is the fact that the metal is concentrated in a much smaller group of producers. David Wilson, a senior economist with Norilsk Nickel, notes that the top five nickel producers control 61 percent of the nickel market. This is in contrast with the refined copper market, where the top five producers control slightly less than 30 percent of the market.

This concentration, he notes, has been going on since 1990, when the top five producers controlled 52 percent of the market. However, according to Wilson, it is still a far cry from 1960, when the top five producers controlled 91 percent of the nickel market.

With the growth of large mining concerns, the consolidation among nickel producers has led to greater discipline in the market, which could keep a better balance between supply and demand.

New capacity is also coming on line. The estimated new supply is expected to top 7.5 percent, with most of the new capacity coming in Asia and former CIS (Commonwealth of Independent States) countries in Eastern Europe.

While destocking has pressured nickel and stainless steel prices through the end of 2007, there is optimism that buyers could return to the scrap market. During the recently concluded BIR Autumn Roundtable, Sandro Giuliani, of Giuliani Metalli-Cronimet, noted that his company had already heard of a modest pickup in stainless steel scrap purchases from Asia, especially from China.

With Asian buyers looking to enter the market by early next year, some European buyers might be compelled to also re-enter the market to ensure they have enough material to meet their needs.

While the long-term expectation is that nickel demand (especially through stainless steel) will grow, Wilson’s report notes an underinvestment in new supply. Additionally, there are some significant delays in other projects that will slow production at some plants.

Despite some of these bullish sentiments for 2008, in the shorter term inventory issues still remain.

According to William Adams, an analyst with BaseMetals.com, the average nickel price, which hovered around $17.66 per pound through most of this year, could come down quite a bit and end up at around $13.80 in 2008. Despite the possible price decline, the level is still far greater than nickel prices seen less than 10 years ago, and as a long-term indicator demonstrates greater interest in nickel and stainless steel consumption.

The wild swing in nickel has been traced to the strong growth in demand from China, which saw stainless steel production jump by around 25 percent this year.

With the overall strength in nickel prices during the past several years, there is more interest in seeking out substitute materials. Several consumers, especially those in China, have been taking lower grades of stainless steel or even substituting material without any nickel content for nickel-bearing stainless steel. Several reports have noted that China, a major consumer and producer of stainless steel, is using nickel pig iron as a partial substitute for refined nickel or ferro-nickel to offset the higher nickel prices.

Nickel pig iron is used almost exclusively in China and is incorporated to make the 200 series stainless steels, which have a much lower nickel content than the 300 series. The result is that in the short term, nickel pig iron production capacity could replace as much as 100,000 metric tons of nickel. However, the report adds that the use of nickel pig iron is not expected to result in a reduction in the overall demand for nickel.

As for the future, Chinese stainless steel production is expected to continue to grow, but, by next year many analysts expect Chinese producers to end up with a surplus of stainless steel. The stainless oversupply should act as a brake for nickel prices through next year.

Despite some short-term challenges, the overall sense is fairly upbeat. Wilson notes, looking to 2008, Chinese stainless steel production should increase to 8.4 million metric tons, while Chinese net surplus in melted production will rise to around 1.2 million metric tons.

Meanwhile, nickel demand should average around 4.7 percent growth for the year, which will be driven primarily by demand from Chinese sources. At the same time, Chinese nickel pig production will likely stabilize at around 90,000 metric tons of nickel units, which will result in nickel markets being in a surplus through the year.

As a further indication nickel prices will be trending toward a less bullish market in 2008, many consumers have been drawing down inventories in expectation that nickel prices will continue to remain sluggish at best.

At the same time, inventory levels at the London Metals Exchange are forecast to climb, according to reports, and a surplus could be seen next year, which is a significant swing from early 2007, when shortages were cropping up.

The author is senior and Internet editor of Recycling Today and can be contacted at dsandoval@gie.net.