Demand woes hit nickel prices Slide to five-month low as Chinese stainless steel producers likely to cut output ANGELA BARNES
INVESTMENT REPORTER
June 21, 2007
Nickel prices slid to a five-month low yesterday and are poised to head lower on reports that several major Chinese stainless steel producers are about to cut output.
Stainless steel producers account for about two-thirds of the demand for nickel. The official cash settlement price dropped 24 cents (U.S.) to $17.56 a pound yesterday on the London Metal Exchange - the only exchange it trades on - after falling more than 6 per cent on Tuesday, the biggest decline in nine months. The price peaked at $24.59 on May 16.
Even the current levels are "quite extraordinary," said Patricia Mohr, vice-president and commodities expert at Bank of Nova Scotia. The previous cycle in the late eighties saw nickel top out at $10.88.
She attributes the correction to several factors, not the least of which are trading rule changes implemented by the LME's compliance department. The change required traders with major long positions to make more metal available to borrowers to increase liquidity. The exchange said that the amendment to the lending guidance instituted on June 7 was done in hopes of preventing "disorderly" market activity.
The change boosted LME inventories of the metal a little, but the bigger factor is that demand for nickel from stainless steel producers may be moderating.
Three major Chinese stainless steel suppliers - Taiyuan Iron & Steel (Group) Co., Baoshan Iron & Steel Co. and Zhangjiagang Pohang Stainless Steel Co.- are believed to have agreed over the weekend to lower their combined output by at least 20 per cent next month.
A Barclays Capital report foresees further weakness in the nickel price. "We continue to expect further downside risk to nickel prices on the back of easing fundamentals and believe that the correction in prices has further to run," the report said.
Bart Melek, global commodity strategist at BMO Nesbitt Burns Inc., also expects the pressure on nickel prices to continue into the third quarter. Beyond that, however, he believes prices will rebound.
"Since demand will pick up later in the year and outpace supply for the next few quarters once again, the correction will be modest by historic norms (with prices likely down a modest 10-15 per cent from yesterday's prices) and of a temporary nature," he wrote in a market comment yesterday.
Ms. Mohr's read on the near-term situation is similar to that of Mr. Melek. She believes the easing of pricing is likely only temporary, noting that demand for nickel usually slows over the summer. "It probably will pick up again in the fall," she added.
Furthermore, she is upbeat about the longer-term outlook for nickel.
"I expect nickel prices to remain in the teens for the next couple of years," she said. The new mine production that is scheduled to come on stream over the next two years is "quite limited," she noted.
"There is tremendous demand for stainless steel around the world and a lot of that demand is for high-specification stainless steel using nickel," she said. That demand has come about because of the boom in investment in things like petrochemical plants, bitumen upgraders and aircraft orders.
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