Tuesday, June 19 Today's official closing prices - cash -...

Tuesday, June 19

Today's official closing prices - cash - $17.80/lb - 3 month buyer - $17.60/lb (16.56% higher than 1/1/107).

Comment - What a difference two months makes. If we had told you 60 days ago, that inventories fell overnight, PT Antam of Indonesia was having trouble with their smelter, and first quarter production at a nickel mine in Zimbabwe had fallen by over 10%, prices could have easily added $.25/lb to $1/lb in a day of trading. Yet, today, with all that news being reported, the market pooh-poohed it as insignificant, and the price fell hard yet again. Two months ago, the bulls were blowing off demand threats and pig nickel production as meaningless, and yet today, that is all everyone is talking about. So, the question should be, have the fundamentals changed that dramatically in the course of a few months? Or is the market being driven strictly by sentiment? And if the latter is true, how much of the recent bull run-up was due to sentiment?
On the fundamental side, we are seeing little evidence of a major change. However, there are some points that are interesting. In 2006, nickel inventories started the month at 18,186 tonnes and ended the month at 10,548 tonnes. During that time, the price of nickel basically stayed the same. The prior June, 2005, nickel inventories started the month at 8,064 tonnes, and ended the month at 7,248 tonnes. The price of nickel actually slid by about $.50/lb (7%) that June, from around $7.26/lb to $6.78/lb. So far this month, inventories have grown from 7,914 to 9,276 tonnes. If this continues, it would be the first June in the last three, to show an increase. So is demand falling because of the typical slow summer season, or is it because of substitution? It would be easy to blame it all on European vacation's, but isn't that an easy cop-out? June of 2005 and 2006 were also in the "typical slower summer season", but their inventories showed declines. Could it be that the threatened substitution is having a bigger effect than many thought? We feel it is very possible, and as we have stated before, nothing motivates end-users to deviate from an established pattern, than anger. Those of us in sales, know there is no better candidate for a new customer, than one who is angry with someone else. 300 series austenitic stainless answered many corrosion problems, and had so many attributes, that after years of proving itself, it has become the industry accepted 'norm', and readily available. It will be months before we start seeing any numbers to prove if substitution is having an effect, but for those who have been dismissing the threat, we feel you would be wise to give it some attention. Pig nickel production in China is obviously making an impact. Although as the price continue to fall, that addition to the supply chain itself becomes threatened. At $20/lb, it is economical to produce nickel this way. As we near the $15/lb mark, that starts coming into question. On the supply side, the LME inventories tell the story. While the vast majority of nickel is sold directly from mine to consumer, the LME warehouses give us a gauge to monitor the amount of "extra" nickel out there. However slowly, it has gained this month, and traders are drinking it in like a tea cup of water in the desert. We say desert, because in our opinion, we don't see any major lakes on the horizon. Yesterday's "extra" inventory stored in LME warehouses gave us no gain, but the Singapore warehouse shipped out 6 tonnes, thus the decline. Cancelled warrants also increased from yesterday, hitting the double digits for the first time this month. So, have the fundamentals really changed? Somewhat, but not enough to convince us we can't be right back to where we were, in a few short months.

And thus, we give credit, or blame, depending on which side of the nickel chain you sit, for the current price correction on sentiment. If you look back at the 2005 figures we gave above, you can see why there are many of those in the stainless steel industry, that feel the current inflated prices have always been more speculative trading, than based on fundamentals. Why is nickel worth so much more today than it was 2 years ago, when we had less nickel readily available? Like many correction's, this one seems to be caught in its own gravitational momentum, much like many believe, the last balloon ride in pricing was due more to the abundance of hot air, than facts. There is also still the question out there of why the LME rule change put the market in such a panic. Is the bull run over? There are things to keep in mind; that might answer that question. The 1.3 billion people in China aren't going to suddenly decide growing rice was more fun that building skyscrapers, and that being poor was more fun than earning an income and buying new things, many made from metals. Their 1.1 billion neighbors in India are just starting to warm up to the idea of mega-growth. Economies worldwide are booming, so demand in nickel, even if tempered by substitution, even if partially met by pig nickel, isn't going to do anything but increase. And as the price declines, the desire for substitution wanes, and the pig nickel source is put into question, and we crawl right back into a sinking boat. There are some major new sources of nickel coming down the pike, but not for awhile, and there are numerous problems we expect to see happen, before they can produce significantly.