Nickel: Short Term Gain, Long Term Pain?

This story features IGO LIMITED, and other companies. For more info SHARE ANALYSIS: IGO

 – Nickel prices have started 2011 solidly
 – Views mixed on market balance in coming years
 – Reflected in wide spread of price forecasts beyond the short term

By Chris Shaw

Commodity prices in general have started 2011 strongly, price gains in the view of National Australia Bank reflecting a combination of a depreciating US dollar and stronger than expected demand growth. Nickel has been no exception, the price of the metal increasing in January by 6.1% in US dollar terms and 5.8% in Australian dollar terms.

Barclays Capital attributes part of this gain to strong fundamentals in the nickel market. Barclays analysts observe nickel LME stocks have fallen by 8,400 tonnes or 6.1% from the peak in early January. As well, the fact the LME stocks being consumed at present are almost all commodity grade full plate metal implies supply chain stocks of preferred inputs such as scrap and ferronickel are close to running dry.

For Barclays this is a clear positive demand-side signal as it indicates a strengthening in global stainless demand after what was a lull in the market in the second half of 2010. As well, Barclays suggests there are anecdotal reports indicating the Asian stainless sector is undergoing a strong bounce in nickel demand.

In the view of Barclays, nickel may be the first base metal to benefit from a move to re-stocking in China, given the indications of recent trade data and signs of a pick-up in premium of the Chinese domestic price to LME prices.

Refined markets should also see some support given reports Chinese nickel pig iron production has fallen 30-40% in month-on-month terms in January, this reflecting constrained ore supply as well as quality and power constraints.

This leads Barclays to conclude the nickel market is moving into deficit, its forecast calling for a shortfall of 18,000 tonnes in the March quarter of this year. Morgan Stanley similarly expects the nickel market to be in deficit this year, lifting its forecast for a deficit in 2011 of 21,700 tonnes from 6,800 tonnes previously.

The change to Morgan Stanley's numbers reflects some supply side issues, as Vale Nickel recently announced the closure of its No.2 furnace in Ontario following a molten metal leak. The closure is estimated to result in a minimum output loss of 15,000 tonnes of finished nickel, though Morgan Stanley expects given another recent stoppage total lost output is likely to be closer to 17,800 tonnes from the Canadian facility.

There are other potential supply side issues for nickel, Barclays noting the ramp-up of production at Goro has to date been poor and a temporary suspension of operations at the PT Inco Soroako smelter has recently been announced. 

One issue for nickel going forward, according to Natixis Commodity Markets, is will the market be able to absorb the coming wave of new projects. Nickel production is already ticking higher, rising by 6.7% in 2010 from a low base in 2009.

But with output expected to increase from Vale's Sudbury and Voisey Bay operations and a number of Latin American ferro-nickel operations coming on stream in coming years, the market will need to absorb additional capacity, reminds Natixis.

Base metal analysts at Natixis expect this will lift nickel production by 9.2% in 2011 and by a further 6.1% in 2012. Chinese nickel pig iron production will also help boost nickel output, Natixis taking the view further gains in nickel prices will only encourage increased nickel pig iron production given the margins on offer at higher prices for the metal.

Medium-term the expected increase in nickel pig iron production is likely to cap nickel prices notes Natixis, though short-term this is less likely as rising coal prices at present are making nickel pig iron production more expensive.

Given its expectations of supply increases in Canada and Latin America, Natixis differs from Barclays and Morgan Stanley in that it expects the nickel market will be in surplus this year. Given this, the group is forecasting an average nickel price in US dollars per tonne of $24,500 this year, declining to US$24,000 next year.

By way of comparison, Morgan Stanley is forecasting prices for this year of US$12.15 per pound or US$27,155 per tonne, up from a previous forecast of US$11 per pound. National Australia Bank's forecasts are somewhere in the middle as its average quarterly price forecasts for nickel stand at US$24,500 per tonne in the March quarter, US$24,750 per tonne in the June quarter, US$25,500 per tonne in the September quarter and US$26,000 per tonne for the December quarter this year. 

Goldman Sachs sides more with Natixis in expecting the nickel market will be in surplus over the next two years, as in the broker's view 2011 is likely to see only modest growth in stainless steel production and nickel supply is likely to ramp up thanks to new projects coming on-line. 

Goldman Sachs's price forecasts are even more conservative than Natixis, standing at US$9.71 per pound this year and US$8.75 per pound in 2012, which is about US$21,700 per tonne and US$19,555 per tonne respectively. 

Citi shares the Goldman Sachs view nickel prices are likely to decline in coming years, as its average annual price forecasts stand at US$24,895 per tonne this year, US$23,675 per tonne in 2012 and US$21,364 per tonne in 2013.

Nickel exposure on the Australian Stock Exchange can be achieved via a number of companies including Mirabela Nickel ((MBN)), Independence Group ((IGO)), Metallica Minerals ((MLM)), Fox Resources ((FXR)), GME Resources ((GME)), Falcon Minerals ((FCN)), Segue Resources ((SEG)), Mincor Resources ((MCR)), Minara Resources ((MRE)), Panoramic Resources ((PAN)), Western Areas ((WSA)), Tectonic Resources ((TTR)), Heron Resources ((HRR)) and Poseidon Nickel ((POS)).

Click to view our Glossary of Financial Terms