Nickel demand to exceed supply

A review of recent trends in the nickel market has led analysts at Richardson Greenshields to forecast a positive outlook for nickel prices over the next year. “There is no sign of an end to the current period of growth in demand for base metals — not in nickel, aluminum, copper or zinc,” writes analyst Ray Goldie in Richardson Greenshields’ latest Institutional Morning Letter.

The study notes that although nickel may not see the 4.5% growth rate of past years, growth in demand will likely average about 1% per annum over the next year.

“Demand will slightly outstrip supply over the next year,” says Goldie, adding that “producers’ inventories will decline and prices will probably move up to around US$4.75 per lb.”

But, he adds, there is less certainty in his forecast for nickel prices than for other metal prices because a significant proportion (about 12%) of nickel supply comes from the East European countries, and knowledge of production in that area is limited.

“Even though our outlook for nickel is positive, we have less confidence in this forecast than we have for other base metals. Accordingly, we would prefer to see investors play the base metal boom via an investment in copper or in zinc,” he says.

The report points out that aluminum, copper and zinc have enjoyed strong growth in demand since the Pacific Rim boom began around the end of 1985. Nickel also participated in that growth; from the first quarter of 1986 to the first quarter of 1990, the demand for nickel grew at a rate of 4.5% per annum.

As nickel prices rose in 1988, Goldie says consumers of stainless steel, which represents the major end use of nickel, protected themselves by building up stockpiles of nickel in advance of further anticipated price hikes.

“This worked for a while. Then, in late 1988, the Pacific Rim boom briefly halted as the Newly Industrializing Countries struggled with labor unrest, shortages of productive capacity, inflation and increased values of the local currencies,” says Goldie.

“In early 1989, the world’s demand for base metals declined, and in the stainless steel business, producers slashed both their output and orders of nickel. So, nickel prices fell, reversing the psychology of the market. By the fourth quarter of 1989, the apparent consumption of nickel had fallen 6.4% below the record level of a year earlier. As stainless steel producers ran down their inventories of nickel everyone wondered: when will they have to start buying again? The answer was in the first quarter of 1990.”

Goldie says the experience of Sherrit Gordon illustrates there is a bottleneck in supply at the mine level. Sherrit operates a refinery, which it is running below capacity because of a shortage of feed stock.

“Although mine capacity will rise by about 3.3% this year, scheduled shutdowns mean that total Western output of nickel will grow at only about 0.5-1% this year,” he adds.