Low inventories help keep nickel high

Assuming the demand for nickel remains strong for the remainder of this year and well into 1989, and that the catching-up process by producers has some way to run until supply overtakes demand, international investment securities firm Shearson Lehman Hutton foresees the price for the base metal averaging $6.15(US) per lb this year and $4.25 in 1989.

“The market will continue to be characterized by low inventories for some time to come,” writes the company in its Annual Review of the World Nickel Industry 1988. “We do not envisage them rising sufficiently to undermine the market until the second half of next year.”

Taking into consideration the market volatility of late and the bullish sentiment of the base metal sector, Shearson also provides a high estimate of $7.15 and a low of $5.50 for 1988, and an average high estimate of $7 and a low of $3.25 for next year.

The nickel price went on a tear earlier this year, hitting a cash price of $10.84 on the London Metal Exchange towards the end of March. More than a year earlier, in January, 1987, the metal was selling for $1.56. Supply disruptions

The year-long uptrend in prices last year accelerated towards the end of 1987 as problems surfaced at Norilsk in the Soviet Union and at Falconbridge’s Dominican Republic plant, where a dispute with the government over an export tax all but shut down shipments of ferronickel from that country. Shearson emphasizes that as important as these disruptions were to the supply side, they happened at a time of record-breaking demand.

“The essential features of the market have been no different in the first six months of 1988 in that supplies have again been disrupted, only this time more seriously, and nickel demand has gone from strength to strength,” write the Shearson researchers.

Demand for the metal was 40,000 tonnes greater than supply last year, a deficit that is expected to decline slightly to 36,000 tonnes this year.

Nickel production expanded last year, increasing by 4% to 528,000 tonnes. Output at Inco in particular was sharply higher and accounted for much of the increase in non-Communist world output. The only other significant increase was from Latin America, reflecting higher output in the Dominican Republic. Lower Asian production

The only area which produced less nickel in 1987 than in 1986 was Asia, where Japanese output was lower, reflecting the closure of Nippon Mining. In addition, there was no contribution from Nonoc last year and ferronickel output from Aneka Tambang in Indonesia was also lower.

Shearson expects producers to try to catch up this year with the record-breaking levels of demand, but will struggle to match consumption. Output is forecast to jump 7% to 564,000 tonnes, with Europe, Japan, New Caledonia and Canada providing the bulk of the growth.

“The pattern of refined production in 1989 is likely to be similar to this year in that the increase will reflect a higher utilization of existing facilities rather than new projects. The projected rise to 582,000 tonnes next year represents a capacity utilization of 93%,” writes Shearson.

On the consumption side, nickel usage expanded rapidly in 1987, growing by 10% to an all-time high estimated at 630,000 tonnes. While all the major nickel-consuming nations participated in the expansion, Japan and the U.S. stand out; in both cases, consumption expanded by more than 15%. Major stimulus

The major stimulus came from the stainless steel industry, where production soared ahead to exceed nine million tonnes for the first time. Again, the U.S. and Japan provided the bulk of the growth. Another factor boosting the demand for primary nickel was the continued shortage of stainless steel scrap. Also, the market was helped by good offtake from the aerospace industry (mostly superalloys) and the revival of the alloy steel industry after many years of stagnation.

The demand for stainless steel carried over to this year. Shearson is predicting a 7% jump in stainless steel production to 9.9 million tonnes for 1988.

A cloudy forecast is offered for 1989. Stainless steel production will tail away towards the end of next year as consumers reduce inventories against a background of uncertain economic activity, and the scrap cycle will turn against nickel demand, writes Shearson.

However, the prospects for other end-uses such as alloy steels and in particular non-ferrous alloys are more encouraging and the impact of the projected decline in stainless steel production on nickel consumption will be mitigated to a certain extent by the health of these sectors.

After some difficult years, molybdenum is facing a somewhat brighter future, Shearson writes in the same report as above. Demand for the base metal, which has mainly steel applications (in alloy, stainless, and tool and high speed steels, etc.), could rise by as much as 6% this year, to be followed by a more modest growth in 1989. Non- Communist world molybdenum consumption was estimated to be 65,000 tonnes last year, similar to the three previous years.

The average European free market price of molybdenum oxide in 1987 was $2.96(US); this year a $3.50 average is forecast.