nickel, page-11

From JBWere investment research:

Goldman Sachs JBWere Breaking Commentary


RECENT NICKEL MARKET DEVELOPMENTS
10/05/05 09:46 Malcolm Southwood

COMMODITIES ANALYSIS; RECENT NICKEL MARKET DEVELOPMENTS

Overall, we believe that nickel market fundamentals are still very positive. Nickel is our second favourite metal (behind zinc) from the perspective of investment exposure. However, we add the important caveat that our nickel preference is a short-term view. We are assuming that the commissioning of Voisey's Bay will deliver finished nickel from early 2006, and that there is a high probability of the global nickel market swinging to modest surplus early next year as a result.

Inventories:

* LME nickel inventories now stand at just 5,664 tonnes, a fresh post-1990 low. We would argue that the occasional days of net-delivery over the past couple of weeks are explained by the very steep backwardation. (The premium for cash over three months currently stands at US$795/tonne, or 36c/lb!).

* Taking reported producer and consumer inventories into consideration we calculate a reported stock-to-consumption ratio of 7.6 weeks, which is low for the nickel industry. (The average stock-to-consumption ratio over the past 15 years has been 12.1 weeks.)

* Of the 5,664 tonnes of metal remaining in LME warehouses, some 40% is on cancelled warrant.

Supply:

* Norilsk produced 59,000 tonnes of nickel in the March quarter, compared with 61,000t in the pcp. This is very consistent with the company’s guidance earlier this year that production for 2005 will be at a similar level to 2004.

* Last Friday (May 6), Reuters quoted Norilsk as saying it has no surplus metal to deliver to the market. It is impossible for us to verify this, but we are a little puzzled as to why Russian exports of nickel halved in February to 8,200 tonnes, down from the more normal 16,500 tonnes in January (Source: CRU International). This does raise a question in our view, as to whether producer stocks in Russia might be rising again.

* We understand that Inco has been active in the market buying third party nickel ahead of its scheduled summer shutdown at Sudbury.

* Our view remains that there will be no major addition to the supply side until Voisey's Bay commissions later this year, with first delivery of finished nickel expected by Inco in early 2006.

Demand:

* The demand picture is mixed. We are concerned that stainless steel inventories are building in Europe and the USA. So far, only Outokumpu (in Europe) has announced an intention to cut production.

* On the other hand, demand for nickel in China has been very strong, with two new stainless steel mills ramping up at Taiyuan and Baosteel.

* In the non-stainless sectors, demand has exceeded our expectations so far this year, with a strong recovery in the aerospace alloys segment, and brisk growth in the batteries market.

* We remain comfortable with our global demand growth forecast of 5.2% in 2005.

Price Outlook:

We remain comfortable with our average price forecast of US$7.10/lb for 2005, falling to an average of US$6.08/lb in 2006.