Nickel, Stainless to Strengthen in 1995

In the wake of 1994's soaring prices, market watchers expect strong demand for nickel and stainless steel through the end of the year.

More than five years after the fall of the Soviet Union, most commodity markets are still feeling the economic repercussions. For years now, the Commonwealth of Independent States -- countries formerly belonging to the Soviet Union -- has flooded the market with nonferrous materials in an effort to generate cash to support their fledgling economies. The result has been a complete imbalance in the world market that has only recently stabilized with the onset of increased demand worldwide.

Most market watchers expect this surge in demand to strengthen the nickel and stainless steel markets through the end of 1995 and beyond.

Nickel demand is expected to outpace output in 1995, according to Francois-Gabriel Sauvage, vice president of sales and marketing for Eramet International. Speaking at the Institute of Scrap Recycling Industries’ annual conference in Las Vegas in March, Sauvage predicted nickel demand to increase 8 percent in 1995, while Western output will only increase by 5 percent.

"Although deliveries appear to have resumed at their previous rate, we feel total exports will be significantly lower this year," said Sauvage. "As a result, the nickel market should come closer to balance this year, with only a marginal surplus, essentially in the form of a moderate stock increase on the LME ... This could very well be a turning point in the supply-demand balance of the Western world."

Not counting the dip linked to scrap exports from the CIS countries, the primary nickel ratio is increasing globally, according to Sauvage. "Among the reasons we can put forward are a strong and regular growth in stainless steel production, constant decrease in scrap generation both at producers and fabricators and the weight of ‘exotic’ consumption areas where recycling circuits may yet be less efficient."

The nickel-to-scrap ratio in 1994 was generally higher than the 1993 figure of about 45 percent, according to Bob Garino, director of commodities for ISRI. "I think that had a lot to do with what was arriving in terms of imports -- in general, but mostly CIS," he says. "There’s an awful lot of demand for stainless steel scrap -- not only here in the states, but also in the export market. Exports just shot up dramatically last year. I think it was all part of trying to find the most economical nickel unit you could find. Even though the primary nickel price increased as much as it did, the nickel contained in scrap was still considered a better bargain."

At mid-April, the spot price for nickel hovered around $3.45, notes Denis Oliver, president of Ireland Alloys Inc., Houston. "Of course, that’s much lower than it was a couple of months ago," he says, "But it’s higher than I would have expected."

With the involvement in the market of a lot of investment funds, speculators acted very aggressively last year and continued their influence over the market, Oliver explains. By about early February, however, bonds and stocks began to look more attractive, and many speculators pulled their investments out of the commodity markets.

"As a result, the nickel market collapsed, and we saw almost a dollar-per-pound drop during the month of February," Oliver recounts. "We’ve recovered a little bit from the lows."

Oliver’s take on the overall market scenario suggests that earlier fears of Russia being unable to produce materials at previous levels have probably subsided, although the possibity that something unexpected could happen.

This is not only due to the economic and social situation there, he says, but "also given the fact that equipment is generally ancient and poorly maintained. "

In addition to the Russian market situation, LME inventory seems to have stabilized after years of oversupply, according to Ron Ebner, vice president of the nonferrous division at Luntz Corp., Canton, Ohio. "I don’t think there’s going to be a lot of big fluctuations," he says. "As far as stainless steel scrap goes, the demand looks to be relatively stable. The iron price will help that, as will the chrome price from the scrap viewpoint."

Jim Lennon, metals analyst for Macquerie Bank Ltd. in London, recently declared a "worldwide boom in stainless steel demand," citing 1994 increases in stainless steel output that approached 12 percent.

Lennon estimates an 8 percent growth in Western stainless to about 14 million metric tons in 1995. "While U.S. consumption is continuing to rise, should an economic slowdown occur in the second half of 1995, a combination of destocking and lower demand could cause a sharp downward correction," he says, suggesting that the dramatic increase in European demand could likely be the result, at least in part, of "overstocking."

Lennon cautions that while the stainless steel situation remains strong worldwide, the possibility of overproduction could negatively impact the level of 1996-1997 output and prices.

"LME started out the year at $2.56 in January 1994," according to Garino. "The December 1994 average was $3.95. It went up from $2.56, then by mid-year it was at $2.89, then by September it was $2.93, then in the final quarter we were looking at close to $4. So worldwide demand for stainless steel was just gangbusters -- not just here in the U.S."

Oliver agrees with assessments by his colleagues of a strong worldwide demand, and suggests the trend will continue through 1995. "The problem, as I see it, is that there is increased production coming onstream," he says. "And I think at the moment we’re seeing a fairly balanced market between supply and demand, with a reduction in LME stock.

"That trend is going to change in the second half of the year, and we will see a market where there are more sellers than buyers. In that situation, you’ll see low prices. But I think you’re going to have this kind of contradiction of continued strong demand, but probably falling prices."

Under normal circumstances, strong demand for a commodity would eventually spell a shortage. However, the heavy stockpiling of nickel and stainless steel on the LME since early in the decade has created a well of material that is not expected to run dry any time soon.

"There’s still 120,000 tons (on the LME)," notes Oliver. "That’s still way above the norm. And even though it’s going down at 10,000 tons a month, you can see that it would get down to 50,000 tons, which would still be fairly high. It’s still going to take to the end of the year, and I don’t think that’s going to happen. I think that we will see continuing strong demand, but I think we’ll see prices under pressure."

Although stainless steel consumption is only marginally related to growth in the GDP, it is generally running parallel with the global economy, said Sauvage. He notes forecasts from the Organization For Economic Cooperation and Development that are "quite optimistic" for the six years to come. "Also, a trend towards desynchronization of the world economies points to a more stable global growth. The latest recession wasn’t as deep as the previous ones, and the recovery might not be as strong."

For the present, the heavy flow of nickel export from the CIS countries since the collapse of the former Soviet Union is expected to continue, "because their domestic industry is decimated, and their demanded for military requirements etc., is almost nonexistent," says Oliver. "There’s been a tremendous amount of nickel coming out, both in the form of pure nickel and in the form of synthesized scrap. By that I mean material which has less than 50 percent nickel in it, which is really nickel iron...If nickel ceases to be the major element in an alloy, the you can export it with much lower export duties than pure nickel."

He adds that a "tremendous fear" had developed toward the end of 1994 that Russian nickel production was going to be adversely affected. "But it appears that they’ve overcome whatever hurdles that they may have been facing. So on that side, things look as if they’re back to normal."

The economy in the remainder of Europe meanwhile, has shown consid-erable improvement in the last 12 to 18 months, according to Luntz Corp.’s Ebner.

"This might slow down some of the export activity, from the standpoint that European chrome prices are not as high as domestic chrome prices," Ebner suggests. "So the US shippers should probably be able to get a little bit more chrome value out of stainless scrap."

But the market improvement has not been limited to Europe, says Oliver. The past nine months have witnessed a resurgence in the Far East markets, including Japan, he said.

"What we’re seeing at the present moment is very strong demand from the stainless industry worldwide, and a tremendous amount of new stainless steel production being brought onstream -- in South Africa, in the Far East and in Europe. Not so much in the states, but there is some here. You have mills which were previously idled being brought back into production.

"I think it will continue," he added, "particularly in Europe. In Japan, we’re just not sure how the stronger yen will effect them in terms of exports, but the rest of the Far East ought to be very buoyant. In the USA, the economy has levelled off a bit, and housing starts are down, so we may see a situation where there may be slightly less demand than previously. But I think it could be further down the road."

The author is former editor of Recycling Today.