Nickel Prices Rally: Will Climb Continue?

By Desmond McMahon– Exclusive to Nickel Investing News

Nickel prices hit  a 21-month high Wednesday climbing to $25,085 a tonne before closing at $24,995 a tonne. That’s up 34.9 percent over the first quarter and with expectations of stronger demand from stainless steel mills, some analysts believe this trend will continue.

The stainless steel industry accounts for about two-thirds of global nickel demand and LME nickel inventories hit a record high with over 166,000 tonnes in early February. But a series of strikes, project delays and production problems have hurt nickel production and inventories have since dropped by about 6 percent – that’s the lowest since late-2009. This year, demand is expected to exceed production for the first time in four years, sending the nickel market into deficit.

BMO Capital Markets Global Commodity Strategist Bart Melek expects nickel prices to firm up as these supply and demand fundamentals continue to improve.

“The likely shift into deficit conditions should also continue to drive LME inventories lower, likely at a faster rate than in the last several months,” he said. “The market is already reacting to this as prices tend to move 30-90 days ahead of actual inventory declines.”

BMO anticipates a fairly large deficit of 36,000 tonnes this year, partly due to delays at Vale’s (NYSE: VALE) Goro nickel project in New Caledonia and the ongoing strike at the Vale Inco operations in Sudbury.

But, Vale’s issues with the Goro nickel project have resolved and the project is now scheduled to be operating in the first half of 2010. Commercial production of nickel is expected to commence this month with 20,000 tonnes of nickel anticipated this year.

Vale has also reached an agreement with white-collar employees at their Sudbury operations on Wednesday.  But, the 3,000 mine workers are still at a labour impasse. The company recently stated they would restart production of the smelter, mill and mines with the help of newly-signed office workers. The announcement drew anger from the strikers, but signals the company’s desire to cash in on the current prices.

Citibank’s David Thurtell is more apprehensive about nickel’s future. He advised that stainless steel order books for nickel are almost full for the second quarter, but adds, “As bullish as I am, on a risk-reward basis, metals are a ‘sell’ at these levels. There is always a risk that the economy disappoints.”

Daniel Rohr, a senior analyst covering mining with The Morningstar, acknowledges nickel prices are climbing again, but believes changes within the nickel industry are likely to prevent prices from soaring to the lofty $50,000-a-tonne territory of March, 2007.

Rohr still believes a shift toward lower-nickel-content stainless steel will have a significant impact on long-term nickel demand with lower-nickel-content stainless steel taking up more of the market share.

Rohr also believes the emergence of nickel pig iron, which is produced from low-grade nickel ore, has introduced a new dynamic to the industry. Nickel pig iron production costs are high, but make sense when nickel prices are strong so nickel pig iron acts “as a pressure release valve when nickel demand and prices are high.”