Nickel Price Pullback A Possibility

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By Greg Peel

It is the nature of the great Chinese production explosion that it constantly runs ahead of itself. Producers are falling over themselves to tap into the economic dream, and the banks have no qualms in handing out the money. Such it is that stainless steel production becomes unnecessarily excessive.

The Chinese thus face a problem of oversupply of stainless steel. This then has ramifications across Europe and other stainless steel producing areas. But nickel, a major ingredient in stainless steel, is in tight supply. Hence the nickel cost is outweighing the economics of stainless steel sales.

What to do? The best thing is to cut production of stainless steel for the time being. This will allow nickel stocks to rebuild and stainless steel stocks to run down. The price of the former should fall and the latter should rise and then everyone can get back to business. At least, that is, until it happens all over again.

And so it has come to pass. The three biggest Chinese stainless steel producers have agreed to cut output this month by 20%. Exactly the same thing happened in the second half of last year. When it did, the nickel price fell 35%.

Merrill Lynch points out that last year Nickel stocks rose 600% from 5kt to 37kt between June and January. Given the factories close for the summer hols anyway, it was just a matter of extended leave.

Merrills is not advocating a nickel price catastrophe. However, with nickel hitting an all-time high of US$11.29/lb, there is clear downside risk.

Nickel stocks have reached pretty much exactly the same point (less than 7kt) as last year. If the script is followed, a price fall looks likely. UBS, however, is currently suggesting that both nickel and zinc look very strong for the rest of the year, with low nickel inventories cited as the reason for bullishness.

It is unclear whether UBS wrote its report before or after the Chinese production cut announcement.

Merrills is also bullish, in the longer term, as it expects deficits to continue for the next two years.

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