Nickel Outlook Falls Victim to Oversupply

By Adam Currie — Exclusive to Nickel Investing News

The nickel market was dealt a blow recently with the announcement that mining companies and refineries are producing more nickel than at any other time in history. This oversupply may very well lead to a reversal in what has so far been an impressive rally in prices.

In a recent report, Barclays Capital stated that production will exceed demand by 45,000 metric tons, a 73 percent jump from 2011, while Morgan Stanley commented that refined output is expected to rise 12 percent, the most in at least eight years.

Nickel prices displayed a month-long rally until early February, but this surge risks running out of steam as import demand from top consumer China eases on the back of a convoluted market and a lack of appetite in Europe.

Mixed outlooks

The metal traded at a five-month high of $22,150 a tonne in early February before a correction, as forecast by analysts, as a result of Chinese buyers pulling back on purchases due to soaring prices and an adequately stocked local market.

Commenting on the Chinese influence earlier this month, Markus Moll, Managing Director at consultancy firm Steel & Metals Market Research, stated: “Today’s nickel price is a good environment again for the NPI (nickel pig iron) producers and that means that the Chinese…will probably not import more scrap so there will be temporary scrap oversupply in North America and Europe.”

This sentiment was underlined in a research report released by Macquarie.

“Our feeling is that the nickel price now looks to have neared a peak as Chinese import demand eases and the risks of a correction in the short run are growing, despite a non-Chinese demand recovery,” it said, adding that: “We think that the current supply demand balance can support nickel prices in the $18-20,000/tonnes range for this year…but not sustainably above $20,000/tonnes.”

Year of the pig?

In a Bloomberg report, it was noted that pig iron may act as a regulator on nickel prices as demand for stainless steel increases. According to Morgan Stanley, the slump in 2011 made 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. It is thought that a reversal in this trend could play out in the market if nickel prices continue to rally.

Not all market players are taking a bearish outlook based on market fundamentals. In a recent interview, Viktor Sprogis, Deputy General Director for Sales and Distribution at Norilsk Nickel (OTC Pink:NILSY), said that the mining giant believes that global prices are close to the level of fundamental support due to a balanced market and high spot premiums, in comparison to the fourth quarter of 2011.

“The nickel market is balanced now. Average prices for 2012 are close to average prices for 2010. We do not expect any meaningful deficit or surplus on the market,” he said. He continued, stating, “China’s consumption of physical metal will increase in 2012, and possibly there could be an additional demand to replenish the government and commercial stocks.”

Morgan Stanley estimated that nickel refined production will reach almost 1.77 million tons in 2012 as demand increases ten percent to 1.72 million tons, providing surpluses for at least two more years.

These circumstances, coupled with a Bloomberg report stating that orders to withdraw metal from inventories has declined 58 percent since reaching a seven-year high in August last year, has led to a bleak short-term forecast on the metal.

It added that the current market outlook has led to a reassessment by some of the market’s larger suppliers. BHP Billiton Ltd. (NYSE:BHP) announced in early February that it will reduce production rates at its Mount Keith mine in Western Australia by 30 percent for “approximately a year” due to lower prices and gains in the Australian dollar.

Not all bad news

While some companies curb production, other projects are gaining momentum. Norwegian miner Intex Resources ASA (OSE:ITX) signed a memorandum of understanding with MCC8 Group Co. Ltd., a Chinese state-controlled engineering and construction company to further develop the world’s newest nickel project Mindoro project, which is expected to reach production by 2015. the world’s newest nickel venture.

Jan Vestrum, Chairman of Intex, spoke to Nickel Investing News last month about the project’s development, and why he feels that there is still room for optimism in the nickel sector moving forward.

In a press release, Cadillac Ventures (TSXV:CDC) unveiled an updated resource estimate for its K1-1 deposit within its Thierry copper exploration property in Ontario. The estimate represented an increase of more than 150 percent over the initial September 2011 inferred resource, with findings of 0.10 percent nickel included amongst the results.

“Cadillac has now received all of the assays reports resultant from the recent drill program at K1-1, and has commenced a resource update. In addition, upon receipt of the updated resource at K1-1, Cadillac will be internally evaluating the economics of the total tonnage at the Thierry project, comprised of the Thierry Mine Resource and the K1-1 Resource,” commented Norman Brewster, President and CEO of Cadillac Ventures.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.