Nickel prices have remained relatively strong despite the jitters in broader markets in early May, as demand returns from the stainless steel sector and supply disruptions continue. LME 3-month nickel came within a whisker of a two-year high in mid-April at $27,590/t, up 49% from the start of the year.

But since then the price has come under some pressure on EU sovereign debt default contagion fears and threats of Chinese monetary tightening. The rapid rise in prices has corresponded well with flattening and then declining LME warehouse stocks, which stood at 143,874t on 10 May, down 14% from their all time high of 166,476t on 5 February.

Restocking therefore appears to be the order of the day and, in the nickel market, in post recessionary periods, this can be very fierce. Rapidly rising premiums in the EU, Japan and US certainly imply this restocking is happening, while rising stainless steel prices indicate improving orders.

The longer-term supply outlook remains constrained on the continued delay of Vale’s high pressure acid-leach Goro project on New Caledonia, which seems to have the market on edge. The future of several similar technologically challenging projects hinge upon the success or failure of Goro and many in the market are waiting to see how successful Goro may be. Vale’s latest setback is owed to an acid spill in late April.

Furthermore, the ten-month strike at Vale’s Sudbury nickel operations in Canada is no nearer to resolution and production rates there remain vastly reduced. This in part explains why US premiums have risen so rapidly in recent months. Scrap supply is also tight.

But higher prices will lead to restarts. The current strong rise in demand is being largely driven by restocking throughout the supply pipeline and not by a real increase in end user consumption. At the same time Mincor and Minmetals are two of a handful of miners that have announced restarts of idled supply while China’s nickel pig iron (NPI) output is already in full swing.

March’s NPI output was an estimated 17,000t as new capacity came online and existing capacity expanded. Once the restocking phase fades, supply may very well outstrip demand, and prices will likely fall from current levels. However, we do not expect this until later this year.

Short term outlook of Nickel

The nickel market has behaved as we predicted. Restocking and supply disruptions have tightened the market considerably and LME stocks are now in decline. The continued supply disruptions have prompted us to revise our estimated nickel market balance down to a 10,000t surplus in 2010, from 41,000t previously. Short-term LME three-month price: $21,000/t-28,000/t.

Courtesy: VM Group research for Fortis Bank Nederland - Metals Monthly May 2010 - Fortis/VM Group

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