Friday August 29, 01:11 PM
ANALYSIS-Nickel risks further sharp fall on slow demand
LONDON, Aug 29 (Reuters) - Nickel prices could plunge another 25 percent by the end of this year, unless orders from stainless steel producers in Europe pick up in the next two to three weeks, industry sources and analysts say.
London Metal Exchange nickel <MNI3> has already experienced a steep decline this year -- three-month metal is down 23 percent and traded around $20,060 per tonne on Friday.
Undermining the market has been weaker-than-expected off-take from the stainless steel sector, which accounts for around two-thirds of nickel consumption.
Demand for stainless steel, which is widely used in kitchen appliances and cutlery, has fallen as consumers slow spending due to fears of economic recession and distributors delay restocking until the market stops sliding.
Nickel demand growth from the stainless industry is likely to be just 3-5 percent this year versus previous market expectations of 8-12 percent, Jim Lennon, analyst at Macquarie Bank told Reuters.
More nickel price pain could be in store unless the stainless market recovers soon, said UK-based Michael Wright, chairman of stainless steel metal recycler ELG Haniel Metals.
'If demand from the stainless steel mills does not pick up in the fourth quarter, we could see prices fall to $15,000,' Wright said. 'We are in a little bit of suspense on the market, it could go either way,' he added.
Roughly 45-48 percent of nickel used in stainless steel comes from scrap, according to Macquarie Bank.
European stainless steel mills were still uncertain about their fourth quarter order book, said Wright.
Stocks in Chinese ports pointed to little demand from that region this year and LME warehouse stocks remain stubbornly high. At 47,022 tonnes, they have registered only a marginal year-to-date decline of 918 tonnes, or 1.9 percent.
That in turn points to a well-supplied stainless scrap market with prices down $500 per tonne this year, Wright said.
SURPLUS EVEN IF BUYERS RETURN
If stainless steel demand does not pick up in the fourth quarter, the mills would have to come back into the market in 2009 after two years of de-stocking, said Macquarie's Lennon.
'The only issue is ... you've had so much production taken out this year and that is going to come back into the market and at the same time you've got new production coming on,' Lennon said, adding this would put prices under downward pressure.
BHP Billiton Ltd <BHP.AX><BLT.L> shut down its 100,000 tonne per year Kalgoorlie smelter in Australia for four months of repairs. That has removed some 20,000 tonnes of supply from the market this year, according to Lennon.
With nickel halving in value since a $51,800-peak in May 2007 other producers have cut output and delayed projects.
Xstrata Plc (LSE: XTA.L - news) <XTA.L> has suspended effective this month its Falcondo ferronickel operations in the Dominican Republic.
Also, Australia's Minara Resources Ltd <MRE.AX> said it had to defer its nickel expansion plan due to high costs.
Chinese nickel pig iron producers occupy the top part of the production cost curve and they are suffering, said Lennon.
Macquarie has slashed its 2008 estimate of nickel in pig iron production in China from 120,000 tonnes to 80,000 tonnes.
This is the major component of total global production losses estimated at over 134,000 tonnes by Macquarie.
'The shocking thing is even with all these cuts -- it still looks like a surplus market of 27,000 tonnes for this year,' Lennon said.
Further market weakness would see prices falling further down the production cost curve and trigger more nickel output cutbacks, Lennon said.
Some producers, such as Minara, are also suffering from low prices for their by-product cobalt.
In 2009, Lennon expected the market to remain in surplus with a lot of new capacity putting prices under pressure.
'But maybe not all these projects will see the light of day.'
(Editing by Peter Blackburn) Keywords: METALS NICKEL/OUTLOOK
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