Western Nickel Producers Differ On Market Outlook

Inco Ltd , the Western world's biggest nickel producer, is telling investors a strong growth story for global nickel demand that favors a higher nickel price.

In contrast, its fellow Canadian and rival Falconbridge Ltd. is less optimistic, saying demand is being bogged down by the current global economic malaise.

Scott Hand, Inco's chief executive, has laid out forceful arguments for solid nickel growth at recent metal conferences, based on explosive growth in China, which he said cancels out weakness elsewhere. Asia is Inco's largest nickel market and makes up 36 percent of the company's sales.

Historically, market commentators have focused on the U.S., Europe and Japan to determine nickel demand. But Hand said China's industrialization is now altering that landscape.

Hand's outlook favors a recovery in nickel prices with supply growth far below demand and nickel-containing scrap exports out of Russia subdued.

Industrial numbers don't tell the whole story, he told a Goldman Sachs forum in New York Tuesday, pointing to demand for nickel for stainless steel, which is up in the United States, Europe and Japan, even without an economic recovery.

"Despite the handwringing of economists, and uncertainties, we all acknowledge 2003 should be a very good year for the nickel market," he told the forum.

Hand said Inco had not seen signs that severe acute respiratory syndrome was hurting nickel demand in China, where the deadly flu-like illness has struck the hardest. Any declines would be evident in the unloading of nickel inventories and that has not happened, he added.

Hand's biggest worry is there won't be enough nickel to meet growing demand over the next few years, with just two new major nickel projects starting from 2006: Goro in New Caledonia and Voisey's Bay in Atlantic Canada -- both owned by Inco.

This shortage of supply is another reason to push nickel prices higher, he said. Nickel is currently selling for around $8,350-$8,380 a metric ton, having settled back from February levels of $9,140, which were 31-month highs.

Inco has forecast a global supply deficit of 30,000 metric tons, with nickel supply growth slowing this year to 3.3 percent. It sees growth in worldwide nickel demand, including China, at 6.2 percent and growth in stainless steel output of 8.5 percent.

In contrast, Falconbridge, the Western world's No. 2 nickel producer, sees 2003 growth in demand, also including China, up by 5.1 percent, with stainless steel growth at 5.7 percent.

The company predicts the global supply deficit will be about 21,000 metric tons this year.

"We are more cautious," said Falconbridge's Santo Ranieri, director of market research. "The bottom line is, when you look at macro-economic data coming out, it is hard to get very bullish."

Ranieri said the nickel price is being held up by the threat of a strike at Inco's big Sudbury operation in Ontario, tightness in scrap supply and the ramp-up of additional stainless capacity.

"How bullish you are is a question of how you see demand developing over the next few years. We see a potential supply squeeze developing but the degree of bullishness hinges on the economic side and how the demand plays out," Ranieri said.

"It seems we keep delaying the economic recovery ... so it is hard to believe that can't impact end-use demand for nickel, especially on the manufacturing side," he added.

Ranieri said it was difficult to expect the SARS outbreak would not undermine China's growth -- if only temporarily.

"If the macro-economics were to improve going into next year, then, yes, we could see a strong nickel market, but it is all contingent on end-use demand eventually really kicking in.

"If it's lethargic and it doesn't, then we probably won't see the forecast nickel that everyone is predicting," he said. Reuters