Slowdown, stocks pressure nickel

Nickel prices have been on a rollercoaster ride in recent years. It faced a rough 2012, and so far it looks like this year will not be better either, as prices have fallen 19 per cent. Prices are down 38 per cent at from the peak of $22,150 last year, trading close to four-year lows, making it the worst performer in the industrial metals complex. It is no mystery as to why these price declines are taking place: too much supply and limited demand.

Nickel prices continue to slide and have fallen way below its cost of production, because of continued global economic uncertainty, local industry cost pressures and depressed commodity prices, which continue to put pressure on most industrial metals. On the other hand, the International Nickel Study Group believes that nickel could record a 90,000-tonne surplus this year, which adds more pressure on the already high inventories, which are at life time high at 195,774 tonnes.

China slowdown impact

The gradual slide in nickel prices is being caused by a number of factors; including the fact the Chinese aren't purchasing as much nickel. That’s because China’s economy is slowing for a number of factors, including the fact that their biggest customers, the US and Europe, are trying to claw their way out of financial problems.

The country is also unable to make as much money because wages for Chinese workers have increased. The use of stainless steel scrap by consumers is increasing and is negative for primary nickel.

Oversupply

The economies in the US and Europe are also stagnating, impacting demand for nickel. At the same time, large mining companies around the world are bringing new mines on line, which adds to the supply surplus.

The INSG in its recent report indicated that the nickel market was almost in balance during April, also noting that Nickel demand in early 2013 improved relative to the latter part of 2012.

That said, the global nickel surplus hit 31,700 tonnes from January to April of this year, and the group still expects world nickel production to hit 1.86 million tonnes this year, with consumption trailing at 1.77 mt.

Production from nickel mines is set to outstrip global demand for the second year in a row. Inventories of nickel in warehouses monitored by the London Metal Exchange have increased by 85 per cent in the past year to a record high, painting a bearish picture for nickel prices.

Supply has been driven in part by the opening of new mines in recent years. New mines do not necessarily pose a problem on their own, but the fact that they have emerged in addition to older mines and not instead of them is an issue. Leading companies that own established mines have made only “limited” nickel production cuts

While there is little to be done about low demand, some reduction in nickel production is crucial.

For instance, Chinese nickel pig iron producers are generally seen as “the high cost producers and therefore, should act as the industry’s swing capacity” by cutting production when nickel prices get too low.

Nickel companies also need to reduce their production of the metal. If such reductions take place, and the excess supply in the market is cornered, nickel may stand a chance of avoiding a performance as disappointing as last year’s.

Such low prices, below cost of production will not sustain for long and this will result in a buyers’ market to hunt for bargains and hold the material, boosting the chances of a rebound in prices more than further price losses.

With recent concerns expressed by producers on falling nickel prices, and gradual announcements of cuts in production, we are optimistic that an uptick may be coming in the not-too-distant future.

Over the medium term, we expect nickel markets to turnaround in six months to a year.

The LME chart shows a bottoming out process, however confirmation of the same will be clear only once the metal sustains above $14,610 (weekly closing basis).

On the MCX, nickel has very strong supports at Rs 775-755 and will not breach these levels with ease. Overall bias looks to be positive and major dips will attract buying for the medium term perspective.

(The author is Associate Director & Head - Motilal Oswal Commodities Ltd. The views are personal)

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