Supply Fears Lift Nickel But Demand May Temper Rise

Nickel prices have been sweeping higher on worries about supply constraints in the coming years, but analysts question whether demand will be strong enough to sustain the rally.

Analysts and traders see supply reined back between now and 2005 by a dearth of new projects, continued scrap shortages and the restraints on key producer Norilsk Nickel, which has 60,000 metric tons of metal tied up as collateral in a three-year loan deal.

"There is good support for nickel and if people continue to read the forward fundamentals it will probably continue to exceed what is (currently) fundamentally justified," said Mark Parker of industry consultants Brook Hunt.

But limited supply might not be enough to push the market higher if consumption growth stutters after picking up this year on burgeoning Chinese offtake from the key stainless steel industry.

Vanessa Davidson, analyst at industry consultants CRU International, said demand had been relatively buoyant this year but CRU had downgraded its stainless steel output forecasts in 2003. The sector accounts for around three-quarters of nickel offtake.

"The longer it takes demand to recover it gives people time to respond (by raising nickel production) and postpones all the tightness," she said.

But Parker saw a tight market even when adopting a conservative view of demand growth. After a balanced market in 2003 he saw substantial deficits in 2004 and 2005. This assumed that Russia's Norilsk disposed of its stocks at some point.

"Inventories could come down to levels that have never been seen historically, and where prices could go is anyone's guess," he said.

Parker saw western stainless steel demand rising by 2.5 to 3.0 percent per year between 2000 and 2005, compared with historical averages of 5.0 percent.

Even the inclusion of double digit growth in China would only boost that to 4.0 percent, still below historical figures.

Greenfield nickel projects are few and far between. The next most likely to see the light is Inco's (N) Goro deposit in New Caledonia, but it might see delays beyond the initial planned start date, Parker said.

Earlier this week Inco said Goro might be delayed by a few months until early 2005 from 2004 as it updates the project schedule and seeks to reduce capital costs.

The advent of the three pressure-acid leach (PAL) projects in Australia in the late 1990s had been expected to herald a new era for nickel, promoting the widespread exploitation of abundant, but until recently worthless dry, laterite ores.

But the problems they have encountered have pushed capital costs much higher than originally thought and producers have started to consider other options.

However, CRU's Davidson saw enough supply coming through from brownfield expansions and other work to satisfy demand.

"I am not entirely convinced by the shortage of material as we go forward," she said.

She said some expansions were not yet at full capacity, such as BHP Billiton's Cerro Matoso ferro-nickel smelter in Colombia, Anaconda Ltc's Murrin Murrin in Australia and Lomo do Niquel in Venezuela.

She said these, and higher output at some other facilities, would boost supply by 25,000 to 30,000 metric tons next year and by a larger amount after that. The Economic Intelligence Unit (EIU) in its latest World Commodity Forecast said: "Prices will rise in 2003 as the heavy oversupply which has stricken the nickel market in recent years diminishes."

But prices would fall again in 2004 as rising production would lead to a return to over-supply, the EIU added.

Brook Hunt's Parker saw nickel prices rising from $3 a lb this year to $3.25 in 2003 and reaching $4 by 2005.

Supplies of scrap were seen remaining tight at least for the next couple of years. Availability had eased in Europe in the second quarter, but this was because it had been held back from Asian consumers, Parker said.