More News from the Deep Woods, this time from David...

More News from the Deep Woods, this time from David Long:-

"Opinion - This is the time of year when purchasing agents begin making plans for 2008. For those who must purchase stainless, or nickel, 2008 looks to be as puzzling as 2007 has turned out to be. None of the major metals analysts we follow forecast nickel to hit the $50,000/tonne limit in 2007, except maybe a few weeks before it actually happened. And for those who forecast nickel would crash during 2007, well they were right - and they were wrong. Three month nickel started the year at $15.10/lb, soared to $23.50/lb in May, then 'crashed'.... to about where it had started the year. For an industry that had grown accustomed to $3/lb nickel over the preceding decade, the talk of records and crashes meant only one thing - incredibly high stainless steel prices all year long. So what does 2008 hold? A lot of questions and few certain answers.
On the demand side, there are signs that stainless producers are returning to the buying side. After the price of nickel self destructed in early summer, producers and distributors put a halt to buying, saddled with over-priced inventory and fearful more loss would come if they bought at the-then-current price. Now in its sixth month of slowdown, inventories of stainless steel have fallen to very low levels in many regions. There are numerous clues that this destructive period of de-stocking has, or is ending, but no producer is going to shout it from the rooftop, with nickel traders salivating for a reason to drive the price higher. We find it interesting that last week, CVRD's CFO told a news conference that "...we are trying to catch up with the demand of our clients." What started out to be another record breaking year of worldwide stainless steel production, is now looking to be a mostly flat year. While there are a thousand scenarios of what 'could' happen, we feel two are the most likely. When producers become less clandestine about their purchases and the resurgence in nickel demand becomes more obvious, as in the growth in LME inventories reverses its present growing pattern, then we will see nickel prices begin to rise. At this point, how producers respond could very well decide what nickel prices will do in 2008. Producers, like consumers like cost stability. And it appears that while the first half of the year offered anything but stability, the period of demand destruction since, has brought some price stability back, albeit at a much higher rate than they had hoped. If prices begin to rise, and producers see no signs of another major price correction, we could see them stay in the game. But the 'crash' of 2007 is still fresh on everyone's mind, so we could see an increase in the price of nickel force both distributors and producers back behind their defences. We tend to feel a mixture of both is likely, which means the market could get very volatile this winter. Inventories have fallen so low in some regions, that distributors will have to buy, whether they want to take the gamble or not. In other regions, seasonal demand will add pressure to produce. China reported last month that it would consume 9.24% more stainless steel in 2007, but this came a month after China's deputy chairman of the China Iron and Steel Association warned, that China's total stainless steel production capacity had surpassed current demand and discouraged any further growth in output.
The nickel supply side is less confusing. Three mega mines are tentatively scheduled to come on line in 2008. Ravensthorpe in the spring, and Goro and Onca Puma in the latter half. Other sources include new mines or expansions at Moa Bay, Caldag, Redstone, and various LionOre operations, among others, are also set to add a significant amount of nickel into the market. It is doubtful the new operation's will offer the market anything more than a immediate psychological boost, as a new mine does not open producing at full capacity. If all open as scheduled, they will undoubtably have an effect on market prices by 2009, but how, and if, this extra capacity could effect 2008 prices, remains less obvious. Current mines are, and have been producing at capacity for years now, as mining companies look to make every penny possible for shareholders during this bull market. This flat out production is risky, as over-taxed equipment suffer expensive breakdown's, and good employee's, hard enough to find and hire, burn out and leave for less stressful careers. BHP, which made the expensive decision to shut down for maintenance this fall, usually an annual situation, was ridiculed by some market watchers as trying to drive prices higher, and some stockholders, for shutting down during a bonanza. Both accusations were ludicrous, but it may give other CEO's pause before taking similar action, no matter how necessary. Since January of this year, inventories of nickel into LME sanctioned warehouses have grown six fold (10 time the lowest point), and are now higher than they were at anytime all last year. This has yet to have the effect on the price of nickel it would have had in past years, as nickel prices continue to hang on. But it does reflect a healthier supply chain. If the cycle follows historical precedent, the world will see a surplus of nickel in the future, as mining companies worldwide respond to a shortage by building too many mines. We aren't there yet, and the growth in LME stocks are currently due to the slowdown in stainless production.
Other factors worth keeping in mind when considering where stainless and nickel prices may be heading. The production of low grade laterite nickel ore, the so-called "pig nickel", has made a dent, however small. In the short term, the high cost of production and environmental damage it causes, has kept its impact minimal. But Chinese scientists are actively working on finding ways of making its use more economically and environmentally feasible. Substitution, while offering a short term solution, could become a long term problem for nickel bearing stainless steel. The path nickel took into record breaking territory in early spring, day after day after day, forced many users to look at other options. Disgruntled customers may change vendors, but rarely the product itself. Infuriated customers start looking for other options, and there are always options. Stainless steel users whom had seen nickel double in price from $3/lb, then double again, and then nearly double again, and had seen stainless more than double in price during the same period, have grown upset, and many are examining other materials. Manganese bearing 200 series stainless, which producers couldn't give away a few years ago, and recyclers feared would contaminate their system, has become a legitimate threat. And while these factors may give the bulls pause, there are other aspects that keep the bears fearful. For the last few years, all anyone has talked about is China. From a non-factor to the world's largest producer and consumer of just about everything in less than a decade, what has happened in China in recent years, could only be described as phenomenal. With a population nearly four times that of the U.S., this country's economy could stop growing at the same unbelievable rate it has for the last few years, and still remain a major driving factor. And no one in their right mind is forecasting a serious slowdown. But putting aside what has, and is happening in China, there are many areas that are experiencing unprecedented growth. Anyone interested in construction can't help but look at what is happening in Dubai and not marvel. The collapse of the Communist block threw Russia into upheaval, but this country now forecasts it will have the world's fifth largest GDP within a decade. And while there are similar success stories on nearly ever continent, we return back to Asia, to China's western neighbor. India, with a population greater than China, is an economy primed to fire. We doubt we will witness growth at the rate we have seen in China, primarily due to geo-political reasons. India's government does not have the luxury of Communist rule, which means plans are dependent on the whims of the world's largest democracy in an extremely fragmented society. But India is a sleeping giant, who may be wakening.
So, with all that said, where do we think stainless prices are heading? We don't really see many reasons for prices to noticeably fall anytime soon, unless LME inventories grow a lot higher, and investors run scared. At the best, we may experience a period of stability, while more likely, prices could be heading up by the first quarter of 2008.
Did you ever notice when you offer a penny for someone's thoughts, they feel obliged to give you their two cents worth? Opinions - you always get more than you wanted. We also remind our readers, that free advise is usually worth what you pay. "