re: inventories about to reverse? 2006 Nickel Demand To Bounce...

re: inventories about to reverse? 2006 Nickel Demand To Bounce Back, Macquarie Says
November 20 2005 - Australasian Investment Review – (AIR)

While recent weakness in the nickel price reflects a sharp increase in supplies of secondary nickel reaching the market, Macquarie suggests 2006 should see nickel demand bounce back strongly.

The last few months has seen significant cuts in stainless steel production reflecting weaker demand outside China, the lower production allowing supplies of primary and secondary nickel to increase and so pushing down the price of the metal.

In the broker’s view this oversupply will last through the first half of next year, but the market is likely to rebalance over the course of 2006, leading to a re-tightening of the market.

Macquarie suggests this tightness will flow through into 2007 before the market again moves into over-supply in 2008 and 2009, when prices are likely to return to long-term trend levels.


While concerns remain over China’s production increases the broker suggests this threat is overdone, as the increase in domestic capacity will be required to meet domestic demand.

In contrast, Macquarie suggests upside support to the nickel price could come from delays to new capacity as new technology proves more difficult and as input costs rise, the last five years seeing an increase in industry costs of 63%.

One characteristic of the market is the consolidation of supply, with the top five producers accounting for 62% of global output. The next eight producers account for 27% of global output, the broker suggesting further consolidation in this end of the market is likely.

One likely outcome of further consolidation in the broker’s view is an increasing concern among nickel smelters and stainless steel producers over the availability of quality concentrate, meaning consolidation similar to that seen recently in the iron ore industry is possible.