Lower nickel prices are forecast 10,000 ton oversupply

Nickel producers have been in a tight squeeze as a consequence of slumping nickel prices and the squeeze is expected to get tighter.

The price of nickel, which was down around $1.70(US) a lb at presstime, will probably drop to $1.50 a lb, knocking off a lot of production capacity, market analyst Ilmar Martens said in a panel discussion in Toronto.

The reason is that stainless steel consumption, which accounts for more than 55% of nickel demand, is traditionally very cyclical, Martens said. (Nickel is an alloying agent in stainless steel production).

“Once stainless steel consumption turns down, new nickel consumption is killed and nickel demand is seriously depressed,” he said. “If that happens, nickel prices should go to $1.50 a pound.” Even with the current historically high nickel consumption level of 1.25 billion lb per year in the non- communist countries, it isn’t necessary for nickel prices to rise, he said. “Bankers will hold the hands of unprofitable producers, and Inco Ltd.,the lowest-cost producer in the world, is not really hurting at current prices.”

Mr Martens and five other panelists were speaking to more than 350 delegates at a symposium of the Metallurgical Society of the Canadian Institute of Mining and Metallurgy.

Martin Webster, manager of market planning for Falconbridge Ltd., also predicts a further fall in prices. He warned that the price may drop to $1.60 per lb before rising to $1.80.

To many the slump in prices may seem unusual considering today’s high nickel consumption level. Stainless steel, at least for the present, continues to be a bright spot. Despite a slight downturn in production compared with last year, the industry is expected to produce about 7.6 million tonnes of stainless steel in 1986. That level has been surpassed only twice: in 1985 and 1984.

With such a high demand for the metal, why is it that prices remain low?

“The simple answer is that there’s too much nickel out there,” Mr Webster said.

“This year the industry must cope with an oversupply of about 10,000 tons, which is more than enough to push down the price. One reason for this is that the Soviet Union has markedly increased its export of nickel to the West and no one was counting on that. While there has been an increase of Western nickel going to East Bloc countries, it hasn’t been enough to offset this difference.”

What’s more, the oversupply may increase in the short term. In 1987, if production in the non-communist world remains what it is now and if the Soviet Union and Cuba maintain current export levels to the West, the oversupply may grow to 20,000 tons, Mr Webster said.

While it’s clear that supply is more than meeting demand in the non-communist coutries, the industry may nevertheless be poised for some improvement, said Walter Curlook, executive vice- president of Inco Ltd. He predicted that several factors will tighten the supply route for refined nickel in the long term. These include Inco’s withholding 15% of its 1986 production capability (due to vacation and production shutdowns) and Amax Inc.’s decision in 1985 to get out of the nickel-refining business.

A structural change seems to be occurring in the industry, Mr Webster said, and unusually low nickel inventories may be part of it. He explained that total nickel inventories held by producers and consumers are at a level representing about four months of consumption. This has been caused, in part, by improvements in transportation, distribution, warehousing and computerization.

“As a general rule in the past, as inventories fell, price would tend to rise. However, since 1982, this has not been the case and now the industry is experiencing both falling inventories and falling prices.”

Nevertheless while major producers such as Falconbridge and Inco have dramatically reduced their inventories, about 40% of Western nickel producers still run relatively high inventories, Mr Webster said. “Until those inventories are reduced to what is required by the market we won’t see any possibility of a major rise in prices.”