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Shiny future: nickel and stainless steel defy gravity as they climb to record price levels, driven by supply shortages and increased interest by investment funds.

Volatile markets for many nonferrous metals may be causing some concern, but dealers of nickel and stainless express strong bullish sentiments for the year to come.

Copper may have captured most of the headlines during the past year, but the climb in nickel prices has far surpassed gains made by many other metals throughout the past several quarters. And while many dealers of other metal commodities say they see possible retrenchment in the short term, most marker observers see nothing but continued strength for nickel and stainless steel.

IMPROVING LANDSCAPE. The International Stainless Steel Forum (ISSF), based in Brussels, Belgium, has released a forecast that reflects the improving landscape. The organization has revised its forecast for world stainless steel production in 2086. The ISSF said the move was needed after figures for the first half of 2006 showed that demand was stronger than initially expected. ISSF is now estimating that 2006 stainless steel production will be up by 14.3 percent relative to 2005.

While stainless steel and nickel markets continue to swell, there is a note of caution: The fastest growing demand within the stainless steel industry is for grades that contain less nickel. The continued high volatility of raw material prices will be a limiting factor for sustainable future growth. The present demand, coupled with the need for suppliers to refill depleted stocks, has led to a 6.5 percent increase in stainless steel production for the first six months of 2006.

While markets for nickel and stainless steel should remain fairly robust for the next several quarters, analysts have been wondering about the feasibility of the materials and possible substitution. While perhaps only a small potential component of the metal business, even a slight swing to another material could put a damper on the market.

The increase in the first half of 2006 came on top of a similar increase in the first half of 2005. However, production in the second half of 2005 was significantly weaker than the first half of the year, according to ISSF figures, which is not expected to occur in the second half of 2006. Contrarily, forecasts show that stainless steel production capacity might be fully used, and new melting capacity is being commissioned.

The global production forecast for 2006 now stands at 27.8 million metric tons of stainless crude steel, up 14.3 percent compared to 2005. All regions will show a significant increase in stainless steel melting, according to ISSF figures, especially in the third quarter.

During the recent meeting of the International Nickel Study Group (INSG), Lisbon, Portugal, global representatives noted that after the middle of 2005, the production of stainless steels with high nickel content declined in most parts of the world, reducing the consumption of primary nickel and nickel-bearing scrap in the second half of that year. Stainless steel production improved in the beginning of 2006 and has remained at record high levels: subsequently, the usage of primary nickel increased sharply and has remained high since then.

Further, the INSG forecasts that global primary refined nickel production is expected to increase from 1.29 million toils in 2005 to 1.45 million tons by the end of 2007

Meanwhile, world primary nickel usage was 1.24 million tons in 2005 and is expected to increase to 1.37 million tons in 2006 and to 1.45 million tons in 2007, according to the INSG.

In 2006 Europe contributed significantly to the expected increase in demand, as did China. The key factor in the 2007 forecast remains China's increasing demand for nickel and nickel-containing products.

Subject to raw material costs returning to historical levels, ISSF forecasts that the long-term growth trend of around 6 percent for stainless steel will also be achieved in the future.

While the overall stainless steel and nickel markets have shown great resilience this year, more analysts and market observers say that the machinations of financial houses and investment funds are driving nickel more and more.

BEHIND THE CURTAIN. During a roundtable meeting on nickel markets hosted by the Pittsburgh Chapter of the Institute of Scrap Recycling Industries Inc., three speakers discussed the nickel and stainless steel scrap market, including price drivers and expectations for the future.

Investment houses have grown from a small, minority stake in the overall commodity market to a dominant position. Derek Benham, president of specialty metals trader Benmet, based in New York City, noted that by some estimates fund business makes up from 70 percent to 80 percent of the turnover in LME stocks. He added that nickel markets are trending so quickly that it is becoming very challenging to stay current with market conditions.

In his presentation at the meeting, Benham said. "From being slight disruptions, funds are now calling the shots, and price movement has more to do with money flowing into and out of the market."

Magnifying the growing role of funds, Benham said that commodity funds have grown from managing around $25 billion several years ago to more than $150 billion this year.

Index funds, another major commodity investment vehicle, also have shown significant increases, with the funds growing from less than $10 billion to $120 billion this year. These funds magnify the growing dominance of these non-physical positions in the nickel and stainless market.

Benham said the resulting effect of such trading is that a growing percent of nickel is under the control of funds. According to figures from the Royal Bank of Canada, the amount controlled by such funds is greater than the value of the output of all global nickel producers with the exception of Inco.

JUMPING PRICES. Reflecting the jump in nickel markets, prices for most types of nickel have surged to record levels. The most recent reports from the London Metal Exchange show primary nickel prices topping $32,000 per metric ton, more than twice the price seen during the same time in 2005. Although there has been some push to drive nickel prices down to below $30,000 per metric ton, the nickel market, through the LME, is expressing greater concern about minimal inventories on hand.

Benham noted that nickel prices doubled between Easter and the middle of 2006.

Simon Merrill, with ELG Metals, a large metals recycling firm that is headquartered in Duisburg, Germany, noted that the ebb and flow of inventory levels also is causing significant upward strength in the markets. The nickel inventories on the London Metals Exchange declined from around 35,000 metric tons at the beginning of the year to around 6,000 metric tons this fall. Merrill said that speculators consider this "a dream come true."

At press time, LME was reporting inventory stocks falling even lower, to less than 4,500 metric tons, the lowest level since the early 1990s. The shortage of inventory, along with several company-specific issues, will cause further upward pressure on nickel and stainless markets in the short term, according to the predictions of several market analysts. Adding to the declining inventory levels, reports as recently as Oct. 10 had nickel inventories on the LME declining to less than 4,000 tons, the lowest level since 1991. Of that amount, only approximately 2,140 metric tons of global consumption would be available for the market.

Inco's prolonged strike at Voiseys Bay, Ontario, has reduced the supply of nickel on the market. Even with a resolution of the strike, it will likely be an extended period of time before the company can build up the supply of nickel on the market.

Benham noted that Voiseys Bay was slated to supply from 55,000 to 60,000 tons of new production per year, or roughly 5,000 tons per month. "Every day the strike is on, it will affect production next year. There is no cushion this year," he added.

The other potential problem is the political strife besieging Inco's project in New Caledonia. As labor problems slow this project, new capacity to help boost inventory levels is becoming more challenging.

Jean Michel Beyasserie, president of Eramet North America, a global nickel producer, said nickel plate is now running at full capacity. Threats of disruption this year have been looming. "There isn't enough scrap on a worldwide basis," Beyasserie noted.

Along with the strike at Inco's facility, Beyasserie said that other nickel projects are off to a slow start. Even with new capacity coming on line, he said he felt it will not be enough to keep pace with demand in the long term.

As for stainless steel, which is the major driver for nickel, Beyasserie noted that even with high nickel prices, inventories of stainless at distributors and service centers have been low, especially during the second quarter of this year.

One area that isn't playing much of a factor in the nickel market has been China. According to the speakers at the ISRI roundtable, nickel markets aren't truly being heavily influenced by Chinese activity. Benham said that during the first seven months of this year China imported 41,000 tons of refined nickel, about 3.5 percent less than what the country took in during the same time last year.

However, while imports of nickel to China have declined, exports of refined nickel from China numbered 10,600 tons during the first part of this year, an increase of 16 percent from the same period in 2005.

While China is still a net importer of nickel, it is more likely buying cheaper nickel concentrates. Much of the concentrate supply is coming from Australian mines that weren't producing three years ago, meaning that the increased orders from China were met by new capacity.

Merrill said that China would be the major growth driver for stainless steel scrap as it adds capacity. This year China became the world's largest producer of stainless steel and is expected to continue to add capacity. Chinese stainless production is expected to increase by 30 percent this year, resulting in China producing close to 17 percent of all the global stainless steel.

While the big concern for dealers in nickel and nickel scrap is the lack of inventory, the situation could become more challenging in the short term. "There now is no cushion for nickel. Should demand ride ahead of supply in 2007, then the run in 2006 will look like child's play," Benham said.

Merrill noted that some of the decline in stainless scrap was because of cutbacks in supplies from Eastern Europe. The decline from this region of the world was partly because of weather conditions as well Eastern Europe's delay in adjusting to the changing dynamic. However, by the second quarter of this year, supplies began to improve. Supply also is expected to pick up because of much higher prices for the scrap commodities.

As for the future of the nickel and stainless market, Merrill said scrap dealers must weigh several issues, including whether the economic boom in China will continue after the Olympic Games, if global consolidation will diminish the role of the specialty recycler and the affect new American capacity will have on the market.

All of these factors present critical reasons for nickel and stainless steel scrap recyclers to keep a close eye on market-related news and developments as 2007 unfolds.

Benham concluded by saying, "For physical traders to not understand the changes is a recipe for disaster."

RELATED ARTICLE: Worth more than a nickel.

A Brazilian mining firm has purchased Inco, the Canada-based producer of a healthy percentage of the world's nickel.

The acquisition makes Brazil's CVRD the world's second largest mining company, according to news reports The company's $17 billion purchase of Inco adds nickel production to an already strong iron ore portfolio.

According to news reports. CVRD will dissolve Inco's board of directors and will no longer list the company's snares on either the Toronto or New York stock exchanges.

But to help make the deal palatable to the Canadian government, CVRD has reportedly agreed to base Its nickel business n Toronto while retaining Canadians in key management posts.

The soaring prices for nonferrous metals have helped prompt a number of large-scale deals in the metals market.

In August, the European firm Xstrata took control of fellow Canadian nickel miner Falconbridge after a proposed Inco-Falconbridge merger could not be worked out.

Arizona-based copper producer Phelps-Doge was also a bidder for Inco but CVRD's bid was considered more beneficial by shareholders.

The author is senior and Internet editor of Recycling Today and can be reached at
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Author:Sandoval, Dan
Publication:Recycling Today
Date:Nov 1, 2006
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