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Nickel Producers Face Output Cuts as Prices Slump, BofA Says

Slumping nickel prices will force some producers to cut output in the next two years to prevent an oversupply, according to Bank of America Merrill Lynch.

“You would need 10 percent less supply next year for the nickel market to look in a much better state, to be even balanced,” London-based head of metals markets research Michael Widmer said. Prices will probably drop to the marginal cost of production, forcing some smaller producers to close down or be taken over through next year and into 2013, he said.

Nickel may fall to $20,000 a metric ton by Dec. 31, the median estimate in a Bloomberg survey of 17 analysts and traders shows. Prices may decline below $15,000 next year if producers fail to scale back output of the metal, used mostly in stainless steel, Widmer said in a June 1 interview. He’s the most accurate nickel forecaster tracked by Bloomberg over two years.

“The second half of this year is going to be weaker, by and large, than the beginning of this year,” said Widmer, who estimated the marginal cost of production at about $17,500 to $20,000 a ton across the industry. “You’ve got a slowdown in stainless-steel production and nickel demand growth, but you have got more supply as well.”

Worst Performer

Nickel for three-month delivery declined $570, or 2.5 percent, to $22,280 a ton by 1:37 p.m. on the London Metal Exchange. Prices are down 10 percent this year, the biggest drop among the six main metals traded on the LME. Nickel will average $26,600 this year and $20,300 next year, BofA predicts, compared with about $25,980 so far in 2011.

Acerinox SA, the world’s largest stainless-steel producer, said June 7 it would temporarily reduce the workforce at a Spanish factory as demand slumped. ThyssenKrupp AG, Germany’s largest steelmaker, plans to separate its stainless-steel operations and other units to focus on engineering and cut debt.

Vale SA expects to increase nickel output by 56 percent this year following two strikes at Canadian mines. The Rio de Janeiro-based company is the world’s second-biggest producer of the metal after OAO GMK Norilsk Nickel, located in Moscow.

Ferronickel mines including Vale’s Onca Puma and Anglo American Plc’s Barro Alto, both in Brazil, are increasing production. In addition, Chinese makers of nickel pig iron, a cheaper alternative to the refined variety, have been “proactive” in adding more metal to the market, Widmer said.

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