Nickel prices dip 4% on sluggish steel demand

Fate of the metal depends on the fortune of steel and Chinese growth

Nickel prices dropped 4 per cent in the local non-ferrous metals market over slack demand from the stainless steel industry. The prices closed in the range of Rs 70,100 a quintal today, down from Rs 72,500 a quintal on Tuesday. The prices still showed a gain of Rs 1,300 a quintal from the December 1 level.

Nickel prices have been weak for most part of this year on sluggish demand from and oversupply in the stainless steel market. Stainless steel largely determines nickel's price, as the former accounts for about two-thirds of the world's demand for the metal.

Despite bullish outlook for Chinese stainless steel production next year, nickel prices have been continuously declining not only in the local non-ferrous metals market but also on the London Metal Exchange (LME).

The prices on LME were hovering around $13,000 a tonne today, a gain of $25 a tonne over the Tuesday price and of $320 over the December 1 price.

Earlier, traders believed that nickel prices could move higher next year with huge support from China as the country's stainless steel output is expected to grow 5 per cent in 2006, to record levels, from this year's insipid 2 per cent growth.

As nickel is mainly consumed by the stainless steel industry, its fate depends on the fortune of the latter, and hence, largely on the Chinese growth.

In the recent past, copper traders diverted some of their funds to nickel seeing the growth potential. But the outlook projected by JP Morgan, which says global nickel prices are expected to fall in the next two years as supply looks set to outpace demand, put nickel prices on a downhill.

It forecasts an average nickel price of $12,100 a tonne in 2006, to fall further to $11,425 a tonne in 2007, against the current price of the above $13,000 a tonne level.

Another reason for decline in nickel prices is the lower use of the metal in stainless steel production. The stainless steel industry earlier used 6 per cent of nickel, which came down to just 1 per cent now owing to higher nickel prices and development of low-nickel but higher-strength stainless steel, a trader said.

JP Morgan analysts said stocks of nickel at the LME warehouses have been rising owing to continuous supply from global producers. The LME inventory stands at 32,172 tonne, higher than 22,992 tonne on December 1 and 8,502 tonne on September 1.

Industry inventories now stand at 11 weeks of supply, which is expected to rise above 12 weeks in 2006 and remain so through to 2008.

The stainless steel inventories look set to go up in the first quarter of 2006, but an ongoing nickel production build-up is likely to ensure that any nickel price rise based on the stainless steel inventory position will be short-lived.

Inco Ltd "" the world's second-largest nickel producer - is expected to start production at its Voisey's Bay project in Canada in Q1 of 2006. The mine, which has an annual capacity of 50,000 tonne, is going to be one of the main contributors to the rise in global nickel supply next year.

India, with no domestic production at all, depends solely on imports of nickel for its total consumption.