Nickel was predicted to be the metal to watch in 2007 and judging by the first few weeks that has certainly proved to be true. The metal made a new record high last week of US$37,200 a tonne on the basis of another small decline in inventories that are already so low as to be meaningless. All the indicators suggest that the market is as tight as it seems and with little to alleviate the situation. French bank Société Générale is forecasting a 25,000 tonne shortfall this year and only a slight reduction to a deficit of 15,000 tonnes in 2008.
Given such a shortage it is presumably only a matter of time before the price starts flirting with the US$40,000 a tonne level. After last week’s rise of 11 per cent another 7.5 per cent to achieve that seems modest by comparison. One factor that will help nickel demand is the falling oil price which dipped below US$50 a barrel last week for the first time in nearly two years as mild weather in the northern hemisphere reduced demand. Lower diesel prices will also help profitability of miners, though with metal prices at current levels profitability is not an issue for many of them.
It is other factors that continue to plague the mining industry like the power cuts in South Africa that affect aluminium smelting and potential strikes at Canadian nickel mines. Stories such as these serve to remind us that the metal story is still very much one about the supply side as the industry struggles to meet demand that actually is not growing terribly rapidly. It is just that the mining industry has been taken by surprise by many years of steady, if mostly unspectacular, growth.
Some forecasters are expecting a correction in one or two metals before too long as supply starts to pick up. Zinc is the favourite to suffer first. Nevertheless, the industry is full of stories of planned starting dates being delayed by a variety of reasons ranging from equipment shortages to planning and environmental consent issues. Mining stocks themselves have eased back a little in the last six months, possibly more so on AIM than in the major indices.
WSA Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
