Bleak outlook for nickel market

The outlook for nickel over the next few quarters and beyond is not great.

In today’s terms, you could even say it’s as good as gold.

Credit Lyonnaise, a major metal trader, has forecast a 10,000-tonne oversupply of nickel for 1997, the same amount again in 1998, and then a whopping 50,000-tonne surplus in 1999.

Even before the recent economic crisis in the Asian (paper) Tiger countries could be taken into account, Credit Lyonnaise predicted a 1998 nickel price of US$7,500 per tonne (US$3.40 per lb.), followed by US$7,000 per tonne (US$3.17 per lb.) in 1999, mostly as a result of oversupply combined with an increase in the scrap-to-primary nickel sales ratio.

Says another metal trader, Billiton Metals, even if demand increases in 1998, in the absence of substantial supply disruptions, the nickel market is heading into a period of significant oversupply accompanied by lower prices.

Nickel prices this past week hovered around US$2.68 per lb.; a year ago the price was in the US$3 range, whereas two years ago it was US$3.66.

Says Billiton Metals, “Prices could fall some way before they hit the bottom.”

The precipitous price drop has prompted a 50% drop in the share price of market leader Inco (n-t) over the past year, such that it has now reached a position few would have predicted possible: that of a takeover target.

Number two Western World producer, Falconbridge (FL-T), has also been hit hard. As a result, U.S. rating agency Standard & Poor’s has revised Falco’s outlook down to negative, from stable. According to S&P, Falco’s performance will suffer as a result of weak nickel prices, the likelihood of excess copper supply over the next several years and an excess nickel supply beginning around 2000, by which time Inco is expected to be producing massive amounts of nickel, copper and cobalt at Voisey’s Bay in Labrador.

“This new excess supply could place downward pressure on prices and lower the cost curve due to the expected low-cost nature of this new supply,” Standard & Poor’s says.

While the future market impact of the Voisey’s Bay project was predicted two years ago, no one predicted nickel would drop so low with production at that project still two or three years off. Much to the contrary: the combination of a 30,000-tonne disruption in supply in the first half of 1997 (as a result of labor disputes) and a 12% boost in stainless steel production was expected to keep inventories low and prices high.

This did not happen. Nickel inventories have actually risen and prices have plummeted. The main reason for this turn of events, says Credit Lyonnaise, is “a massive unpredicted surge” in Russian primary and scrap nickel exports that have flooded the Western markets. Consequently, nickel prices have drifted down, averaging US$7,182 per tonne (US$3.26 per lb.) in the year to date versus US$7,504 (US$3.40) in 1996.

Exports from Russia are expected to continue to hold the key to the direction of nickel prices, and, says Credit Lyonnaise, “It is difficult to see at this stage why the current trend in Russian exports should not continue.”

Former east bloc exports are expected to reach 215,000 tonnes in 1997 versus 190,000 tonnes in 1996. Russian nickel exports totalled 98,640 tonnes in the first half of 1997 — a 40% increase from 1996 levels. In addition to the primary metal, scrap supplies from Russia are running at twice the normal level, adding almost 60,000 tonnes of nickel to the supply side annually.

Credit Lyonnaise notes that significantly higher tonnages of scrap could be exported if logistical problems are overcome.

Since the start of the year, nickel inventories have been edging up because of the rise in Russian exports. Total stocks (producer, consumer and London Metal Exchange) are currently 177,000 tonnes, versus 169,500 tonnes at the start of the year. Producer stocks have fallen marginally to 82,000 from 85,000 tonnes. However, the more visible LME stocks have increased by 12,000 tonnes to the current 60,936 tonnes. Thus, combined stocks currently represent 10.1 weeks of Western World supply.

While Inco’s Voisey’s Bay mine, at a possible 122,000 tonnes of nickel per year, is the biggest new producer on the horizon, it will be preceded by a number of smaller mine startups, including Forteleza in Brazil, a Rio Tinto (rtp-n) operation that is expected to start up in early 1998, adding 10,000 tonnes to world nickel supply. No to be overlooked is the Raglan mine in northern Quebec, where Falconbridge expects to produce 20,000 tonnes of nickel in 1998, and up to twice that amount in the years beyond. In addition, the strength of Cuban nickel production is a major worry for major nickel producers, particularly if forecasts of 90,000 to 100,000 tonnes (compared with the current 54,000 tonnes) of production are realized by the year 2000.

On the demand side, stainless steel producers are boosting their output, but more and more they are using scrap nickel instead of more expensive primary nickel sources. Because of this, LME stocks have risen.

Nickel demand in the major manufacturing countries of the Far East had been skyrocketing in recent years (South Korean demand was up 24% from 1996 to 1997 alone), but demand has dropped dramatically in recent months as a result of the overall economic crisis in Asian countries.

Current growth on the production side exceeds the amount that can be easily absorbed by the stainless steel market. Consequently, inventories held by distributors and mills are rising.