an interesting piece from andy home, reuters columnist.
40.
-- Andy Home is a Reuters columnist. The opinions expressed are his own -- By Andy Home LONDON, Jan 20 (Reuters) - The LME "street" doesn't do prolonged recessions very well. A natural tendency to bullish exuberance has been accentuated by the extraordinary bull run of the last few years. That part of the cycle is definitively over but there is already a palpable impatience with metal prices that are languishing at multi-year lows. The market is poring over the news for signs of a turning point that might herald a return to the good times. Will China's State Reserve Bureau come to the rescue of the copper market by buying up half a million tonnes of the red metal ? How many more zinc mines must close before that market moves to balance? And does the stalling of the uptrend in LME nickel stocks signal that prices are now close to the bottom ? Nickel, though, far from being at a turning point may serve as an object lesson in the perils of false dawns. STOCKS STALL It is indeed true that the seemingly inexorable rise in LME inventories of nickel has lost a lot of momentum since the start of January. LME stocks of the metal rose by 9,342 tonnes in Q3 2008 and by a further 22,788 tonnes in Q4 2008. They ended last year at 78,822 tonnes, their highest level since mid-1995. So far this month, however, the rise through Friday (reported Monday) has been a highly modest net 186 tonnes, in stark contrast to the accelerated stocks build that is still being seen in other metals such as aluminium, copper and zinc. This divergence in nickel stocks behaviour is down to one key development, the absence of arrivals of full-plate metal at Rotterdam in the first two weeks of 2009. The last warranting of such metal at the Dutch port took place on Dec. 31, 2008. Through Jan 16 Rotterdam received no metal at all and the system as a whole no full-plate cathode. The pattern is not a new one. Rotterdam was similarly inactive in the first half of January in both 2007 and 2008, part of a broader pattern which tends to see LME stocks decline in the first two months of any year. That reflects a seasonally strong period for nickel demand. Or, to be more precise, some forms of nickel demand. It is worth making the obvious point that only refined nickel is deliverable against the LME contract. Ferronickel, which is exclusively used in the stainless steel sector, is not deliverable and therefore does not show up in LME stocks. Nor is the cheaper-priced alternative for many stainless mills, stainless scrap. STAINLESS SHOCK So, even assuming that LME stocks do not start building again in the coming days, the apparent levelling out of the uptrend provides only a highly limited signal about the state of the non-stainless nickel market. Stainless, however, accounts for the lion's share of nickel demand at around 70 percent and there is no sign yet of any turnaround in this all-important sector. Indeed, there are strong suggestions that the stainless market is weakening even further. Harder evidence will come with the start of the Q4 2008 reporting season but one major stainless producer, Finland's Outokumpu, has already waved a red flag in the form of a Dec. 23 profits warning. "Stainless steel demand has weakened further and Outokumpu's fourth quarter performance will be below earlier indications. The company is taking actions to prepare for a period of possible prolonged demand weakness and will now prioritize profitability improvement and cash generation in the short-term," Outokumpu warned. Another red flag is coming from the ferrochrome market, which like nickel is closely linked with the stainless steel cycle. Japan's biggest stainless producer Nippon Steel & Sumikin Stainless (NSSC) confirmed to Reuters last week that it is considering skipping entirely first-quarter shipments of ferrochrome from South Africa because it simply doesn't need them. South African ferrochrome producers are responding. Merafe and Xstrata said last week they were idling another 6 furnaces at their joint venture, meaning around 80 percent of annual capacity has now been cut. That surpasses anything yet seen in the nickel market when it comes to curtailments at the biggest producers. The concern must be that nickel producers, particularly ferronickel producers, are going to have to implement a second round of cuts if the stainless sector doesn't improve soon. Not only is there no sign of that happening but macroeconomic indicators are still deteriorating, suggesting the bottom of the current manufacturing recession is still some way off. In this context the apparent bull signal coming from LME nickel stocks is very probably a false one, the first of what is likely to be a number of false dawns for metals demand. OVERSUPPLY That is not to say that economic recovery is not going to happen, unless you believe that the world is entering a recession of the magnitude seen in the 1930s. And when it comes, the economic up cycle could be just as explosive as the downturn currently taking place. The stainless steel sector will be a major beneficiary. However, the impact on nickel prices may not be quite what the hibernating bulls imagine. Not only will idled production capacity be quick to restart to meet recovering demand but the market risks being swamped by metal from new projects. These were planned at the height of the 2005-2007 bull market, a supply surge that anticipated the good times would roll without interruption. Currently on hold, they now represent the potential for structural oversupply even when the good times do roll again.
WSA Price at posting:
$3.85 Sentiment: None Disclosure: Held
