Caught between the opposing forces of slowing demand and tight supply conditions, this year’s nickel markets are likely to be turbulent. But, after spending the past decade eliminating excess capacity, a healthy demand outlook should sustain good nickel prices in the 1990s. Through the early and mid- 1980s, we saw nickel prices in the US$2-$2.50-per-lb. range. The year 1988 brought with it a nickel price explosion, with the metal averaging US$6.25 on the London Metal Exchange (LME) for the year and peaking above US$10.
Following another strong year in 1989, with LME nickel prices averaging US$6.04, 1990 saw a return to more reasonable levels of US$4.03. While other base metals also surged in the 1988-90 period, none matched nickel’s performance (see accompanying table).
Because the conditions which led to the unprecedented surge in nickel prices remain in place, and are an important factor in any forecast of future prices, it is necessary to examine the state of the industry throughout the last cycle.
Through the early 1970s, good demand growth and a relatively high price attracted a great deal of new nickel capacity. Much of the new production came from energy- intensive laterite deposits. The 1973 and 1979 oil price shocks, however, had a disastrous effect on their profitability.
Nevertheless, with a strong demand outlook and high hopes, many of the high-cost producers remained in production until the realities of the 1982 recession forced cutbacks. In 1979, the peak year of the last cycle, nickel mines operated at about 73% of capacity, which compares with about 82% in 1989, the most recent peak operating year, and 80% last year.
This capacity overhang moderated prices on the LME. Through the last capital spending and metals cycle, which occurred through mid-1979 to 1982, average monthly nickel prices rose only 20% from US$2.54 at the start of the cycle to a peak of US$3.05 in March, 1981. This compares to increases of 56%-311% achieved by other base metals.
With the severity of the 1982 recession and rapidly rising inventories, production was cut back and, eventually, capacity was reduced. Driven by lower grades, declining mine productivity, the need to absorb excess inventories as well as rising Eastern Bloc exports, the Western world’s mine capacity and production continued to decline until 1988. We estimate that capacity declined by about 450 million lb., or about 26%, over the period. (See accompanying chart.)
While the nickel industry was wrestling with the excess capacity and inventories, which kept prices stable and low, demand grew at a very healthy clip. This growth in nickel consumption was largely driven by unprecedented growth in stainless steel production. Much of this growth over the past decade was fueled by Japan and Western Europe, which saw stainless steel consumption increase at an annual average rate in excess of 16%.
Measured by a growing emphasis on product quality and performance, the demand for stainless steel grew rapidly, increasing in importance as a market for nickel. Non-ferrous alloys, which are found in many similar applications, are the second-largest consumer of nickel, and, when combined, these markets account for about 75% of nickel consumption.
By 1988, inventories were low and the Western world’s demand for nickel overtook supplies, resulting in the inevitable crunch.
Reliance on rapidly depleting inventories and scrap metal caused Eastern Bloc imports to rise. Shortages developed, prices surged and nickel surcharges were both demanded and received by stainless steel producers. In 1989, consumers of nickel and stainless steel began to adjust; stainless producers shifted to lower-cost, nickel- containing scrap and consumers substituted lower grades of stainless steel and other metals. The result was reduced demand for primary nickel.
Looking to the future, nickel prices will be determined by the same factors as in the past. In the near term, the most important variable will be demand. Worldwide economic activity continues to slow and will probably not recover before mid-year.
The largest end-markets for stainless steel — consumer products, capital goods manufacturing and the automotive industry — when combined, account for about 60% of demand. In 1990, the demand for this group contracted and the outlook remains bleak for 1991.
Longer term, the growth of stainless steel consumption should be strong, about 4-6% per annum through the 1990s. This growth will be driven by new applications for stainless steel and performance- related substitution from other metals. This growth in stainless steel consumption translates into a 3-5% growth outlook for nickel, substantially better than the 2.5-3% forecast for most base metals.
The tight supply outlook for nickel is a far cry from the large excess capacity which existed in the early 1980s (when we last entered into a recession) and is a reason for optimism. In 1991, we believe Western world production will continue to account for about 90% of nickel consumption.
With a return to moderate nickel prices, the possibility of mothballed facilities being reopened disappears, and, if high oil prices persist, several energy-intensive plants may be forced to curtail operations. After rising through the 1980s, Eastern Bloc exports peaked in 1989. East Bloc capabilities and intentions remain a wild card in the supply equation.
Another wild card is the very real possibility of supply disruptions because of plant failures and accidents. It is impossible to predict the timing and severity of such losses. Already this year, nickel markets have been lifted by news of a fire in December and moderate production losses at a SLN plant in New Caledonia. After nearly three years of flat-out operations, it would be surprising if no further losses were experienced this year.
Anticipate volatile nickel markets with a general downtrend through 1991. Inventories will rise moderately, absorbing a relatively high level of Eastern Bloc exports. As a result, nickel prices should drift lower in the first half of the year and through the seasonally- slow third quarter before recovering in the fourth quarter. Nickel prices for the year should average US$3.75.
In 1992, we expect demand to recover and prices to average US$4. By 1993, resumption of the longer term, high demand growth rates could push beyond current capacity. Planned expansions by Inco (TSE) at its Thompson, Man., division, by Western Mining in Australia and at Cuban facilities will alleviate some pressure, but we expect prices to move up, trading in the US$4-$5 range through the mid-1990s.005 0000,0606 Victor Lazarovici is a metals and mining analyst with securities firm BBN James Capel, Toronto. Avg. price (US$/lb.) 1981-87 1988-90 Change Nickel 2.19 5.44 148% Aluminum 0.56 0.93 66% Copper 0.69 1.23 76% Lead 0.23 0.32 41% Zinc 0.36 0.68 88%
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