Large institutions arguing and postioning themselves either side...

Large institutions arguing and postioning themselves either side of the Nickel argument. I'm on the bulls side but I could be wrong

Nickel Price Outlook Divides Deutsche Bank, JPMorgan (Update1)

By Chia-Peck Wong and Chanyaporn Chanjaroen

Feb. 5 (Bloomberg) -- When it comes to nickel, the best performing commodity the past 13 months, JPMorgan Chase & Co. is determined to prove Deutsche Bank AG is full of so much hot air.

At stake is $55 billion of metal mined from New Caledonia to western Canada, and the rising cost of 300,000 stainless- steel products from General Electric Co. jet engines to kitchen sinks. More than $11 billion is riding on a Deutsche Bank call that nickel will appreciate again in 2007.

Prices of nickel, used to make stainless steel, have doubled in seven months to $37,000 a metric ton, after reaching the highest in more than two centuries of trading on Jan. 26. Nickel soared during the past five years as China stepped up stainless-steel production and overtook Japan as the world's largest supplier of the commodity.

The market is ``over-inflated,'' says Jon Bergtheil, the head of global metals strategy at JPMorgan in London and an industry analyst for three decades. ``Nickel's fall will be worse than the pace copper has seen,'' dropping at least 25 percent this year, he said.

Nonsense, says Deutsche Bank analyst Michael Lewis, who told customers on Jan. 12 that nickel is the favorite pick among industrial metals because producers can't keep up with demand. Germany's biggest bank raised its forecast for average nickel prices to about $31,500 in 2007 and to $31,000 in 2008. Nickel in 2006 averaged about $24,150.

``The ramp-up in Chinese stainless steel capacity in 2007- 08 is now expected to sustain strong demand growth for nickel at elevated levels,'' the bank said in a report. Lewis, who works in London, couldn't be reached to comment.

Low Inventories

Rising nickel use sent inventories at the London Metal Exchange to the lowest since July 1991, too little to supply steelmakers for even one day in the event of a shortage. Nickel gained 147 percent in 2006 and has risen 12 percent this year. Prices are five times higher than the average of $6,945 a ton during the 1990s. More than $11 billion of nickel futures are outstanding on the LME, which sets world benchmark prices.

Metals prices are so high that the U.S. Mint last year banned exports of nickels to prevent scrap merchants from melting down coins in developing countries. The 5-cents coin, which is 25 percent nickel and 75 percent copper, contains metal currently valued at 7 cents.

Chinese companies such as Shanxi Taigang Stainless Steel Co. and Baoshan Iron & Steel Co. will boost production 37 percent this year to about 7 million tons, from 5.1 million tons, according to Beijing Antaike Information Development Co., a government-funded research group.

Bearish Sentiment

Some analysts say China has found an alternative in nickel pig iron, a lower-cost metal mined in the Philippines. The substitute may cause imports of refined nickel by China to drop 11 percent this year because it costs 40 percent less than the refined metal, said Xu Aidong, a metals analyst at Beijing Antaike.

Each time nickel prices doubled in a year during the past two decades, as they did in 2006, they've fallen the next year.

A drop in nickel prices would hurt Russia, Canada and Australia, the world's three biggest exporters. Profits would suffer at producers including Cia. Vale do Rio Doce, Brazil's second-largest company, and OAO GMK Norilsk Nickel, where shares have gained 14 percent this year.

Merrill Sees Drop

Merrill Lynch & Co. analyst Daniel Hynes says prices will tumble and average $23,700 a ton, 40 percent less than today. Hynes, who works in Sydney, spent six years with nickel producer WMC Resources Ltd. before it was bought by BHP Billiton Ltd., the world's biggest mining company.

``Nickel gains came after the Chinese put up a large amount of stainless-steel capacity,'' said Bergtheil, 52, of JPMorgan, the third-largest U.S. bank. ``Now we are reaching the stage of having too much stainless steel. The Chinese government has tightened regulations to rein in overheated industries, and one of the latest aims at stainless steel.''

U.S. suppliers already are seeing nickel demand decline.

``People don't seem to really need more metal and the higher prices are driving them away,'' said Patty Bowlin, a saleswoman at Eagle Alloys Corp. in Talbott, Tennessee, which supplies customers including GE, Boeing Co. and Honeywell International Inc. ``Stainless steel has become more readily available and so now it's harder to sell'' both nickel and stainless steel.

U.S. stainless steel inventories rose to 809,000 tons in November, up 17 percent from the end of 2005, according to CRU, a London-based metals consulting company.

Cutting Back

Stainless-steel producers, users of about two-thirds of the world's nickel supply, are reducing the amount of the metal in their products, said Staffan Malm, secretary-general of the International Stainless Steel Forum in Brussels, which represents companies that make 85 percent of world output. Production of nickel-free stainless steel now accounts for as much as a quarter of global output, up from 21 percent three years ago.

JFE Steel Corp., Japan's second-largest producer of stainless steel, will double output of nickel-free products this year from 3,000 tons a month currently. Monthly production will rise to more than 10,000 tons in the year ended March 2009, said spokesman Hiroshi Okamoto in Tokyo.

``If somebody would have told me that the price for nickel would hit $35,000, I would have considered that completely impossible,'' said Ekkehard Schulz, the chief executive officer of Dusseldorf, Germany-based ThyssenKrupp AG, the world's biggest stainless steel producer. He declined to give a forecast for prices.

Bullish Banks

Morgan Stanley, the second-biggest U.S. securities firm by market value, is siding with Deutsche Bank. The New York-based firm raised its 2007 price forecast for nickel by 35 percent to about $32,000 a ton in a Jan. 30 report.

``Continued delays to major new growth projects will extend this period of above-trend prices through the end of the decade,'' Morgan Stanley said. UBS AG, Europe's largest bank by assets, said in a report Jan. 31 that nickel will average about $32,000 this year, 32 percent higher than its previous forecast.

The price of the metal for three-month delivery gained 1.5 percent to $37,400 a ton in London on Friday.

Brazil's Vale, which paid $16.7 billion last year for Inco Ltd., the world's second-largest nickel producer, says that new mines are needed.

``Mines coming on line are merely replacing old mines that are winding down,'' Chief Executive Officer Roger Agnelli said in Rio de Janeiro last month. ``Even with new mines, overall production won't rise much.''

Agnelli's Voyage

Agnelli will fly to New Caledonia, the French Pacific Ocean Island, this month to present a new plan for Vale's Goro project. The mine, already under construction, may start producing nickel in ``late 2008 or early 2009,'' Agnelli said. Goro is the world's largest nickel project under development.

Producers elsewhere around Asia will help increase supply. Atlas Consolidated Mining & Development Corp., based in Mandaluyong City, the Philippines, said last week it began shipments from its Berong Nickel Corp. venture that mines low- grade ore for China.

Eramet SA, based in Paris, last week reported nickel production climbed 4.7 percent in 2006 to 62,383 tons. A mine strike that reduced output in the fourth quarter was settled last month, and production is returning to normal levels.

Prices are ``highly speculative and disruptive to the market,'' said Philippe Joly, spokesman at Eramet, which operates the world's largest ferronickel smelter. ``It's negative for consumers in the long run.''

U.S. Economy

As supplies recover, growth in the U.S. economy, the world's largest, is tapering off, hurting sales of stainless steel. The economy should expand by 2.5 percent in 2007, according to a Bloomberg News survey of 62 economists, down from 3.4 percent in 2006.

``It's the economy that drives metals demand and prices,'' said Andy Sunderland, vice president of Metal Specialty Co. in Broken Arrow, Oklahoma, which sells $5 million of metal a year, 25 percent of which is nickel and stainless steel. ``Metals prices don't drive the economy.''

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