Nickel/Stainless Update: From the Ground Up

Nickel markets should hold up fairly well over the next 12 months thanks to a careful balance between supply and demand. Stainless and nickel’s steadily improving performance should continue over the next year, especially if many manufacturing segments begin to improve. However, continuing problems in the aerospace industry concern many vendors.

GROUNDED

During the Institute of Scrap Recycling Industries Inc.’s (ISRI) Nickel/Stainless Roundtable, held this fall in Pittsburgh, several speakers noted continuing problems with the aerospace industry are putting downward pressure on markets. Ed Newman, vice president of Keywell LLC, Pittsburgh, rattled off a list of stories that highlight the difficult situation.

"When we look at today’s business picture we can somewhat understand how hard it can be to be an optimist in a pessimistic time," said Newman. "Honestly, it was hard to find a bright spot," he noted in regard to the headlines. "Boeing delivered 527 airplanes in 2001. This year they expect to deliver 380, a drop of almost 30 percent. Next year they project to deliver between 275 and 300 airplanes—another 25 percent drop. They have let nearly 30,000 workers go to date.

"American Airlines announced in August that it is retiring another 74 airplanes and is deferring delivery on 35 new planes that they had planned to take delivery of this year. They also plan another 7,000 layoffs. US Air is in Chapter 11, and there are reports that United might not be far behind," he added.

Newman continued by noting that General Electric, the world’s largest maker of jet engines, expects engine deliveries to fall 15 percent to 20 percent this year and a similar amount next year.

STAYING STEADY

Even with such a bleak forecast for one of the main end markets for the specialty grades of nickel and stainless steel, many handlers of the metal have seen steadily improving prices. The main reason for the improved pricing is nickel's balance between supply and demand.

During the ISRI meeting, Yuri Sobolev, senior vice president of Norimet-Norilsk Nickel, the large Russian mining concern, noted that his company has taken a significant amount of production off line. This move reverses an earlier trend when Russian metals producers were accused of dumping their commodities on the world market, resulting in much lower prices.

Several scrap nickel handlers note that Norilsk has a large block of nickel warehoused at the port of Rotterdam, Netherlands, as collateral for loans. This move has tightened supply and demand for the material.

It is not likely that this nickel will be placed on the open market until prices climb much higher, according to Patricia Mohr with Scotia Bank, an investment company that tracks commodity markets.

The lack of available scrap nickel is not limited to the U.S. Reports indicate that scrap nickel supplies are limited in Europe and Asia as well. The result has improved the overall pricing environment for the metal.

"Western World stainless steel production will rise by almost 5 percent in 2002, after last year’s inventory correction," says Mohr. "Though global stainless steel output may falter temporarily in the fourth quarter, the impact on primary nickel demand will be limited by tight scrap supplies."

In its October meeting the International Nickel Study Group (INSG) reported that nickel production and consumption should end up sharply higher this year. For 2002 the group forecasts that world primary nickel production should increase by around 3.6 percent, with production in the West increasing by 4.6 percent. The INSG is an autonomous, intergovernmental organization whose members are comprised of nickel producing, consuming and trading countries.

The INSG also expects nickel production to grow by 3.5 percent next year, with production in the West climbing by 4.7 percent.

While production should show some promise, nickel consumption should increase by 5.4 percent in 2002 and by 6.6 percent next year.

With the conflicting information for the nickel market, it is no surprise that the overall trend is pointing upward. Despite the recession in the manufacturing segment over the past two years, the strength in consumer purchases has helped prop up prices for nickel over the past several quarters. With the expectation that the manufacturing segment will start to turnaround, the feeling is that prices, after a temporary lull leading into early 2003, should begin improving.

While long term the fundamentals look good for stainless, short term the market for scrap nickel will fluctuate significantly.

Al Goodman, a trader with ELG Metals, Chicago, says that nickel is a thinly traded commodity, making it more volatile.

While volatility makes it difficult to predict market conditions for nickel and stainless in the short term, the two metals show a definite growth pattern. Goodman notes that China is a strong end market. As China seeks to modernize, growth in demand for nickel, stainless steel and other metals will continue to outpace demand in the U.S.

Nickel, which is used in the production of stainless steel, has outperformed the other industrial metals this year and is likely to sustain its strength in 2003, Jim Lemmon, an analyst with Macquarie Research, said. Lemmon, speaking at a London Metal Exchange seminar earlier this fall, said that nickel will be the only LME metal to rise this year, with cash prices averaging about $3 per pound, some 10 percent greater than last year.

CHINA’S STAINLESS FUTURE

In his presentation, Lennon added that the key to strong nickel prices is stainless steel demand, which accounted for about 66 percent of total Western world nickel demand in 2001 and that this year it is "the only area of growth."

Added Lennon, "There are two key reasons for this. One is a shortage of stainless steel scrap, which is putting upwards pressure on nickel prices. But the biggest driver is China, whose stainless steel demand grew by 26 percent last year and is projected to grow by 25 percent this year to 3.05 million metric tons.

"In 2002, China will account for around 18 percent of world stainless steel demand, compared with just over 11 percent in 1998," said Lennon. "This year, we estimate that the growth in Chinese demand alone will account for 73 percent of total growth."

According to a INSG report, while shipments of scrap nickel to China will be up sharply this year, overall scrap nickel exports will end up at slightly more than 20 million tons, dropping more than 20 percent from 2001 export figures. INSG figures show reduced shipments to Belgium, Canada, India, Japan, the Netherlands and Taiwan were the main reason for the drop in scrap nickel exports.

A CHANGING WORLD

Several processors of the grade note that traditional end markets for nickel are going toward substitute materials such as plastics, which is cutting into the demand for scrap nickel.

Meanwhile, the bio-medical industry, which is using various types of metal blends, is generating interest. However, this sector uses far less nickel and stainless than the aerospace industry.

Larry Snyder, manager of nonferrous metals for Metal Management Inc., Chicago, feels that while December markets will be "awful," next year should show decent market strength. His bullish outlook also notes that Chinese buying of nickel and stainless scrap, as well as many other commodities, has transformed this previously sleeping giant into a much stronger commodities buyer, one that could eventually surpass the United States in economic strength.

Snyder is less sanguine concerning domestic markets. The devastation in the aerospace industry has played havoc on many end markets for the material. With very little sign of an improvement in this segment, however, supply and demand are balanced, which has helped keep nickel prices on a modest recovery. "We don’t see much downside," Snyder says. Supply and demand are good, they are close to being in balance."

Ken Zuckerman, CFO of Abbey Metal Corp., a New Jersey-based scrap operation, says that while he is fairly bullish about the long term market for nickel, a host of wild cards are in the mix, including the potential start up of the Voisey Bay nickel mine in Canada.

While the start of Voisey Bay in Newfoundland could have a major impact on nickel markets, Metal Management’s Snyder says he has been hearing about the proposed start for a long time and is taking a wait-and-see approach before factoring the proposed mine’s impact on markets.

Zuckerman adds that Russia's high tariffs on scrap nickel, which have choked off a significant amount of scrap nickel, have been positive. This follows a move in the last decade when the former Soviet Union dumped a tremendous amount of metals on the market for currency.

While the next year should be promising for scrap nickel, some analysts are less certain about the trend over the next two to three years. While the lack of new projects, continued scrap shortages and Norilsk keeping around 60,000 metric tons of material in inventory should help markets, further out, the lack of a significant increase in consumption could cause slides in the market.

But, as many scrap nickel brokers are quick to point out, as volatile as nickel markets are, whatever they say today may be totally wrong by the next day.