nickel update 18

21/02/2007 14:05 >> =DJ FOCUS: Producers, Consumers Alike Feel The Nickel Price Bite


Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Record high nickel prices are starting to become problematic for producers and consumers alike, with the former facing credit issues and the latter being priced out of the market, analysts say. And the situation doesn''t appear about to ease in the near future, with London Metal Exchange nickel prices continuing to establish new record highs on an almost daily basis. Nickel has been on a bull run since the end of 2005, when prices hovered around $11,500 a metric ton. Supply-side worries coincided with exceptionally strong demand from the stainless steel sector, which uses nickel as its key ingredient. Since November 2005, nickel has gained a massive 250% and has managed to avoid the selloff seen in other metals and commodity markets. But prices above $40,000/ton are nowtaking their toll. At 1015 GMT, LME nickel was trading at $39,250/ton. "Producers that hedged forward are facing credit margin calls as prices continue to rise," said London-based UBS analyst Robin Bhar. Initial margins are credit lines an investor is required to set up with the London clearing house LCH.Clearnet, and represent the largest likely daily price move. Nickel initial margins were recently lowered, to $20,784 per six-ton lot from $21,000/lot. Although they''re only usually reviewed quarterly, traders say they''ll likely be hiked once more, with LCH/Clearnet able to make ad-hoc adjustments if market volatility changes significantly. Higher margin calls are most likely to hurt short position holders and put producers'' credit lines further under pressure. "It''s not as if producers have the excess stock to make deliveries and reduce short positions; all production seems to be being delivered against commitments," Bhar added.Dwindling stocks have been a key factor in the market''s dramatic rally. LME data shows that stocks in LME warehouses stand at a tiny 3,930 tons. But because 1,866 tons of this is canceled, meaning it''s about to be drawn down, there''s just 2,064 tons available to the market - around half of a day''s global consumption. There''s been talk in the market that a significant tonnage of metal, said to be Russian in origin, is sitting off warrant in Rotterdam. Yet analysts say they believe this metal is acting as a buffer stock for Russian mining giant Norilsk Nickel Co., so it can make deliveries when navigation at the port of Dudinka is interrupted by ice for the winter. Dudinka is Norilsk''s only export outlet. Norilsk declined to comment. Consumers, too, are inevitably feeling the pinch. High nickel prices mean that some consumers, notably in China, are starting to use cheaper pig iron instead to manufacture stainless steel. Pig ironis produced from low-grade laterite nickel ores imported by China from the Philippines. So far, it''s mainly been used to make 200 series stainless steel, which has a lower nickel content than the more traditional 300 series but can be used in similar applications. Increased use of pig iron would be a bearish factor for the nickel price, analysts say, though could be the saving grace of consumers and, ironically, producers struggling to meet margin calls. "Demand destruction is inevitable at these price levels," said U.K.-based BaseMetals analyst Will Adams. "The market had best be prepared for the possibility that 50,000 tons to 70,000 tons of nickel demand could be removed if China continues to use pig iron to make stainless steel," he adds. Given that only limited new nickel supplies are expected to come through over the next couple of years, the market looks set to remain tight in the near term. So far, substitution hasn''t become much more than a distant threat to the nickel market. Developments with substitution are still new and won''t likely kick in until further out, if at all, analysts say. However, London-based Michael Widmer at Calyon says pig iron is already starting to erode nickel consumption. "There was news recently that companies, like Baosteel, had despite the initial problems managed to incorporate nickel pig iron into the production of higher quality 300 grade stainless steels," he noted. "This should further enhance the usage of nickel pig iron," Widmer added. -By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; [email protected] (END) Dow Jones Newswires 21-02-07 1305GMT Copyright (c) 2007 Dow Jones & Company, Inc.