Mining companies and refineries are producing more nickel than at any time in history, expanding a glut that threatens to reverse this year’s rally.
Production will exceed demand by 45,000 metric tons, a 73 percent jump from 2011, Barclays Capital estimates. That’s equal to 46 percent of stockpiles tracked by the London Metal Exchange. Refined output will rise 12 percent, the most in at least eight years, according to Morgan Stanley. Prices, which rose 7.8 percent to $20,170 a ton this year, may fall as much as 13 percent to $17,630 a ton by Dec. 31, the median of 11 analyst estimates compiled by Bloomberg shows.
Metals have returned to a bull market from a 22 percent slump last year on an improving outlook for global growth with manufacturing in the U.S. capping the biggest two-month increase in more than two years in January and unexpectedly gaining in China. With new supply expected from Australia to Madagascar to Brazil, consumption still won’t expand fast enough to absorb the extra metal. Most markets for stainless steel, accounting for 76 percent of nickel demand, remain “depressed,” Deutsche Bank AG said in a report Feb. 15.
“We’ll get more and more supply over the course of the year,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “We expect huge surpluses for nickel not only this year, but next year, and probably in 2014. It’s mainly due to an increase in supply, but on the other side the stainless steel industry is facing a tough time.”
The LMEX gauge of six industrial metals rose 11 percent this year, as the Standard & Poor’s GSCI index of 24 commodities added 8.6 percent. The MSCI All-Country World Index of equities gained 10 percent and Treasuries lost 0.7 percent, a Bank of America Corp. index showed.
Refined production will reach almost 1.77 million tons this year as demand increases 10 percent to 1.72 million tons, providing surpluses for at least two more years, Morgan Stanley estimates. Stockpiles in warehouses monitored by the LME rose 17 percent to 97,308 tons since Nov. 9, bourse data show. Orders to withdraw metal from inventories declined 58 percent since reaching a seven-year high in August.
Additional supply will come this year from Vale SA’s Onca-Puma and Anglo American Plc’s Barro Alto mines in Brazil and Glencore International Plc.’s Murrin Murrin and First Quantum Minerals Ltd.’s Raventhorpe in Australia, according to Morgan Stanley. Projects by Vale in New Caledonia and Sherritt International Corp. in Madagascar will take total production from new operations to 117,000 tons in 2012, the bank estimates.
That production may arrive more slowly than the market is anticipating because mines are using extraction processes that previously fell behind schedule, Daniel Brebner and Xiao Fu, analysts at Deutsche Bank in London, wrote in a Feb. 15 report. The bank raised its forecast for this year’s average price by 21 percent to $22,500.
Some mines are curbing output. BHP Billiton Ltd., the world’s third-largest producer, said Feb. 1 it will reduce rates at its Mount Keith mine in Western Australia by 30 percent for about a year because of lower prices and gains in the Australian dollar. The Melbourne-based company pays costs in the local currency and sells its metal in U.S. dollars, which has depreciated about 16 percent in the past two years.
Accelerating growth may mean demand exceeds analysts’ expectations. U.S. manufacturing grew in December and January at the fastest back-to-back pace since 2009, Federal Reserve data Feb. 15 showed. Factory output in China, the biggest nickel user, unexpectedly expanded in January, the country’s statistics bureau and logistics federation reported Feb. 1. Manufacturing in the U.K. jumped in December by five times as much as economists forecast, the government said Feb. 9.
Pig iron, a substitute made from lower-grade ores mined in Indonesia and the Philippines and processed in China, may also act as a regulator on nickel prices as demand for stainless steel increases. The slump in 2011 made so-called primary nickel cheaper than pig iron, as steelmakers used more of the refined nickel substitute. That in turn spurred steelmakers to use more refined nickel, driving cuts in pig-iron production, according to Morgan Stanley. The trend could be reversed should nickel prices keep rebounding.
There are signs that demand for stainless steel may be strengthening, according to MEPS (International) Ltd. The Sheffield, England-based industry consultant predicts a 5.8 percent gain in global stainless-steel output to a record 33.9 million tons in 2012.
Lower prices may hurt earnings of producers. OAO GMK Norilsk Nickel, the biggest producer, will report a 5.8 percent decline in net income this year to $4.49 billion, according to the mean of seven analyst estimates compiled by Bloomberg. Nickel accounted for 53 percent of its sales last year, data compiled by Bloomberg show.
Norilsk expects nickel to average $19,000 in its 2012 budget, two people with knowledge of the matter said last month, down 17 percent from the LME’s benchmark three-month contract average of $22,865 last year.
Japan, the second-biggest consumer of the metal, contracted an annualized 2.3 percent in the fourth quarter, more than economists estimated, the Cabinet Office said Feb. 13. The International Monetary Fund cut its 2012 growth forecast on Jan. 24 to 3.3 percent from 4 percent and warned that Europe’s debt crisis threatened to derail the world economy. Europe will account for 23 percent of global nickel demand this year, according to Morgan Stanley.
“This will be a difficult year,” said Nick Trevethan, a senior commodities strategist at Australia & New Zealand Banking Group Ltd. in Singapore.