Nickel, this year’s best-performing commodity, is poised to decline as world supplies climb at the fastest pace in a decade and China’s search for lower-cost alternatives slows demand growth.
Vale SA’s $4.3 billion Goro mine in New Caledonia is scheduled to start this year. Global output will jump 6.8 percent, the most since 2000, said Bank of America Merrill Lynch. China, the biggest consumer, more than tripled production of the cheaper nickel pig iron in the first quarter, said Wang Chongfeng, a Shanghai Metals Market analyst.
Nickel has climbed so much that the 5-cent U.S. coin contains 6 cents worth of metal and prices are 59 percent above mining companies’ breakeven level. The commodity, which beat the other 23 futures in the Standard & Poor’s GSCI Index, will drop 19 percent by the third quarter to $21,250 a ton, according to the median estimate of 17 analysts surveyed by Bloomberg News.
“The price is way ahead of itself and will serve as nirvana for world nickel producers,” said Nick Moore, head of commodity strategy at Royal Bank of Scotland Group Plc in London, who has followed metals for more than 25 years. “The higher the price, the more likely a deluge of supply comes to market.”
The commodity for three-month delivery advanced 42 percent this year as of the close on April 30 and reached a 23-month high of $27,595 a ton on the London Metal Exchange April 16 after stainless steelmakers boosted output by the most since at least the early 1970s, according to Macquarie Group Ltd. The metal, which helps protect steel from corrosion, finished last week at $26,300 per ton and today dropped 6.1 percent to $24,701 per ton.
World stainless steel output jumped 55 percent in the first three months to 7.9 million tons from a year earlier, and will increase 20 percent to 31 million tons in 2010, the biggest gain since 1976, Macquarie said.
A reversal would cut costs for manufacturers of everything from kitchen sinks to aircraft fuel tanks, while hurting profits for OAO GMK Norilsk Nickel of Russia, the world’s biggest maker, whose shares jumped about 122 percent in the past year.
Mining companies need at least $7.50 a pound, or $16,535 a ton, to spur new production, according to Peter Richardson, chief metals economist for Morgan Stanley Australia Ltd. in Melbourne. World refined output will probably climb 6.8 percent to 1.38 million tons this year, said Michael Widmer, head of metals market research at Bank of America Merrill Lynch.
The Goro mine will add almost 60,000 tons once it runs at capacity, which may take “two-plus years,” Peter Poppinga, executive vice president Asia and Pacific for Vale’s nickel unit, said in March. The company expects to begin operations this year, Toronto-based spokesman Cory McPhee said in e-mails last week.
Vale, the fourth-biggest maker in 2009, may restore output at its Sudbury smelter in Canada, which has operated at 50 percent capacity since January after workers walked out in July. The company planned to boost production at its Clydach refinery in Wales to capacity by the end of last week, taking semi-processed metal from its Sudbury operations, McPhee said.
Global mine supply may increase by 114,000 tons this year, including new output from Talvivaara Mining Co.’s operation in Finland, Jinchuan Group Ltd.’s Munali mine in Zambia, and Western Areas NL’s Forrestania project in Australia, said Widmer.
“We think prices will soften, peaking in the second quarter and gradually easing,” said David Wilson, director of metals research at Societe Generale SA, and previously Norilsk’s senior economist for almost four years.
The biggest risks to users are the drop in stockpiles since February, sustained demand from steelmakers and mine or smelter disruptions. Prices are likely to remain “well supported for longer than the market currently expects,” said Morgan Stanley’s Richardson, who has followed metals for 23 years.
Worldwide requirements will exceed production by 17,500 tons this year, according to the median estimate of 14 analysts in the Bloomberg survey between April 26 and April 30.
Consumption is being led by China, where the economy expanded 11.9 percent in the first quarter from a year earlier, the fastest pace in almost three years, and urban fixed-asset investment jumped 26.4 percent. Manufacturing also grew at a faster pace in April as the Purchasing Managers’ Index rose to a seasonally adjusted 55.7 from 55.1 the month before.
The country more than tripled production of nickel contained in pig iron to a record 44,000 tons in the first quarter, said Wang from Shanghai Metals Market April 29. Shanghai Metals is a unit of researcher CBI China Co.
Output of nickel in China may jump 13 percent to 313,000 tons this year from 278,000 tons in 2009, according to Xu Aidong, an analyst at Beijing Antaike Information Development Co. The increase may cut imports of the metal and its alloys that totaled 250,216 tons in 2009, according to customs.
“If your cost for nickel pig iron is about $15,000 a ton and you are sitting at $27,000, it’s a no-brainer” to switch, said RBS’s Moore. “There is going to be a lot of pig iron.” China’s ore and concentrate imports rose 72 percent in March to 1.64 million tons, the highest level since September, customs figures show.
The last time the metal rallied, in 2006-2007, production of pig iron and climbing global stockpiles contributed to a slump after the price reached a record $51,800 a ton in May.
‘Burst of Restocking’
Inventories reported by the London Metal Exchange totaled 145,314 tons last week, up from less than 5,000 in May 2007. One party held 50 percent to 79 percent of the warrants as of April 20, a total that dropped to 30 percent to 39 percent the next day, LME data show.
“It’s going to be difficult for the market to maintain upward momentum” after the position was reduced, Wilson said.
Outokumpu Oyj, a Finnish stainless steelmaker, said April 27 that inventories among supply chain distributors in Europe were estimated to be normal after a recovery in demand. That signals that “the burst of restocking” which boosted nickel demand in 2010 may not last beyond the middle of the year, according to Barclays Capital.