In an attempt to come out of a deep recession, governments of badly mauled countries, including the US, China and Japan have begun a more than $2-trillion economic stimulus spending. Even while we have been spared the pains of a recession, New Delhi also felt the need to pump in liquidity into the economy.
But for fund managers, the world stimulus spending signals inflation and flattening of dollar. Sharp rises in outstanding contracts in commodities are proof of migration of funds from cash to other assets, including base metals. If three month copper has risen meteorically this year to $6,500 a tonne, the rise of aluminium to $1,913 a tonne is also no small progress from lows of around $1,300 a tonne earlier this year.
Unlike in steel where capacity remains fragmented, the presence of a fewer number of producers has helped in quicker adjustment of production of base metals to demand changes. We are once again seeing how swing capacity in aluminium is behaving for the good of the industry. A lot of aluminium capacity whose viability is linked to a price range of $1,500 to $1,750 a tonne had to be mothballed because of market collapse earlier. Much of that is now back in production.
Improvement in prices of base metals and also of minerals is largely attributed to restocking process in China. Many think this is now largely complete. If that be the case, then we should normally be seeing demand for a number of commodities slackening.
But shall we be wrong in believing that where China lets it go, the US and Western Europe could pick up the baton of restocking. We are finally seeing evidences of improving demand from West. Germany, France and Japan have recorded growth in the second quarter. US housing seems finally to be gathering in pace. But is demand improvement driven by a restocking or by a combination of restocking and real demand? That China and India are doing much better than the rest of the world is known. The rest of the world has “stabilised” but at historically low levels of consumption.
That stimulus spending as also restocking, particularly in China have helped in improving the sentiment for base metals beyond argument. Nickel, used primarily to rustproof steel and zinc, also an important alloying agent are playing catch up with the two frontline base metals.
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Sustained improvement in world steel production, thanks principally to China, from 89 million tonnes in April to nearly 104 million tonnes in July has indirectly acted as a prop to nickel and zinc. China where monthly steel production crossed 50 million tonnes for the first time in July had doubled imports of nickel to 120,000 tonnes in the first half of 2009 over the same period last year. But the Chinese nickel import surge leaves one to suspect that imports may be in excess of actual usage by local stainless steel mills.
SAIL chairman Sushil Roongta says he could lift steel sales by 20 per cent last month on a year-on-year basis, confirming that the bounce expected from stimulus spending has started working. Stainless steel is a relatively small part of SAIL portfolio making negative contribution to 2008-09 bottomline. But Roongta has plans well in place to make operations of all the three SAIL stainless steel mills profitable on a sustainable basis.
Forecast to the effect that demand for stainless steel in China may rise 8 per cent to 6.76 million tonnes and the Indian use may improve by 10 per cent to around 1.5 million tonnes which will have a significant bearing on future pries of nickel. Mind you, the Chinese $585-million stimulus investment leading to fast tracking of infrastructure projects is creating an incremental demand for 500,00 tonnes of stainless steel.
The Indian use of this special steel will get a further boost if the government will see to it that it is used in making railway coaches and portable gas cylinders to make them lighter and also enhance their longevity.
Nickel should also be drawing strength from a JP Morgan report that “there is a significant scope for stainless steel mills in the western world to raise production, especially in the light of record low levels of inventory.”
The final price decider for nickel will be to what extent the recent price improvements will bring idle capacity back into production. The prospect of the Brazilian Vale restarting production at its two Canadian sites and similar such actions by others could keep nickel prices in check. Operators are trying to guess to if the estimated world supply of 1.29 million tonnes of nickel this year will be in excess of demand.