Short-Term Outlook For Nickel Price Improved

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This story features METRICS REAL ESTATE MULTI-STRATEGY FUND, and other companies.
For more info SHARE ANALYSIS: MRE

By Chris Shaw

As its fundamentals have continued to deteriorate nickel has been the
worst of the base metals complex in recent months as the 3-month price
fell to a 2-year low of US$22,000 per tonne early this month, which was
a fall of more than 50% in year-on-year terms.

According to Standard Chartered the market is currently oversold and so
there is potential for some sort of bounce in prices in the shorter-term, though with the market expected to remain in oversupply the group retains its bearish medium-term view.

In terms of actual forecasts the group now expects prices in the
September quarter to average US$26,000 per tonne, up from US$24,000
previously, while in the fourth quarter it is forecasting an average of
US$24,000 against US$22,000 previously. This is predicted to fall to an
average of US$22,250 in 2009.

Driving the poor price performance of the metal in recent months in the
bank’s view has been disappointing demand growth, driven primarily by
cutbacks by Asian stainless steel producers. This is key for nickel market prices as it notes stainless steel accounts for about 65% of total global demand for nickel.

Evidence of this comes from Chinese steel producers, who are attempting to cut output in an effort to reduce oversupply in the market. At the same time the last week or so has seen something of a supply side response as Australian output will be limited by shutdowns at the operations of both Minara ((MRE)) and BHP Billiton ((BHP)) – this in total accounts for about 2% of global supply.

As well Standard Chartered notes Chinese pig iron producers, which have had a major impact on nickel supply, are struggling at present as their operations
on average require a nickel price of around US$22,000 per tonne to be profitable and this is being made tougher by higher oil and coal costs.
If production here is limited it goes a little way to improving the
market’s fundamentals.

While this should increase the chances of a boost in the metal’s price in coming weeks Standard Chartered points out the market should still record a surplus this year of as much as 24,000 tonnes, meaning the market balance still won’t be favourable longer-term.

GSJB Were agrees the outlook for the next few months is brighter on the back of the lost production in Australia in particular, the broker reacting by lifting its price forecast for the second half of 2008 to US$11.50 per pound (US$25,300 per tonne) from US$11.00 per pound previously. This suggests an average price for 2008 as a whole of US$12.00 per pound (US$26,400 per tonne), up from US$11.75 previously.

Given the modest increase in price estimate and the more positive
sentiment this suggests the broker on Friday upgraded its ratings in the
sector, moving to Hold on Western Areas ((WSA)), Independence
((IGO)) and Minara ((MRE)), all of which it had recently downgraded to
Sell given its previously more negative view of the prospects for the
nickel market.

It is worth noting despite the upgrades in rating the broker continues
to see downside earnings risk for each stock as its forecasts remain at
the bottom of or below consensus market forecasts.

Commodities specialists at Citi, however, have flatly refused to make
any changes to their price forecasts, projecting nickel’s price to
average US$/12lb in H208, and subsequently slipping to US$10.00/lb in 2009.

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