=DJ FOCUS:Nickel Outlook Tied To China Stainless Steel Recovery (Dow Jones News Service)
Updated: Thursday, August 21, 2008 04:54AM ET
By James Campbell
Of DOW JONES NEWSWIRES
SINGAPORE (Dow Jones)--The latest production cutbacks in the nickel industry after a steady decline in prices have fueled hopes that nickel may be near a floor, but much still depends on the health of the stainless steel industry, where China holds the key, say analysts.
A major reason for the most recent downswing in nickel prices which fell more than 30% since the start of the year was slow stainless steel demand, particularly in China.
About 65% of nickel produced worldwide is used in the manufacture of stainless steel, according to the International Nickel Study Group.
Nickel's plunge to a two-year low of $17,370 a metric ton this month, down 66% from a record high of $51,800 a ton in May 2007, encouraged stainless steel consumers to stay on the sidelines, anticipating stainless steel prices would fall and forcing producers to pass on the lower nickel costs through lower prices.
Along with offering price discounts, stainless producers have also been cutting production, another measure dampening nickel demand for the time being.
Nippon Steel and Sumikin Stainless Steel Corporation of Japan and Baosteel and Tisco of China have all made production cuts in recent months, in an attempt to stabilize stainless steel prices.
Last week, Korean steel giant Posco (005490.SE) confirmed a production cut of around 20% during August.
But some market participants say a post-Olympics return to normalcy in the Chinese economy combined with the stainless steel industry's own production cuts could help clear stocks further, in turn improving the outlook for nickel.
"The overall stronger tone (for base metals) in recent days does seem to be on the back of high expectations that China will come out of the summer slowdown, and having destocked ahead of the summer, will need to restock and could end up chasing the market higher," BaseMetals.com analyst William Adams said in report.
"This seems a plausible outcome, but we do feel that going forward, slower demand outside of China is also going to weigh on the markets, so any rally in our view is likely to be short-lived and a spike," he said. The stainless steel market in China has certainly tightened since June, which is impressive given the slowdown in factory activity widely reported ahead of, and during, the Olympics.
According to an industry source, inventories at Wuxi, a major stainless steel trading center in China, were currently around 125,000 tons, down more than 30% from a reported 180,000 tons in June.
But that may not enough to lift nickel demand immediately.
"Nickel demand may lift in the latter part of 2008 or first half of 2009. But current indications are that any lift in nickel demand may be more muted than we had been anticipating, given sluggish economic growth in developed economies," said David Moore, commodity strategist at Commonwealth Bank.
End To Chinese Production Cuts Eyed
While reduced stainless steel production in itself is negative for nickel, the cutbacks may not last beyond this month, especially in China, said Max Layton, a commodity analyst at Macquarie Research in London, speaking last week.
The fact that nickel has consolidated since reaching its recent low on August 6 should also encourage the bulls as this may be taken as a sign that prices of stainless steel products won't be reduced further.
According to Macquarie, stainless steel production could return to pre-June levels within August, eventually boosting demand for nickel.
Standard Bank also took this view in a recent report, saying nickel's retreat below $20,000 was excessive and that the market could rebound after the Olympics, once Chinese stainless steel production ramps back up.
Producers Bet On Demand Recovery, Buy Back Shares
The view that nickel prices are close to bottoming was supported by Perth-based nickel and gold miner Independence Group (IGO.AU) which announced a share buy back on Aug 8 after investors hammered the stock amid falling base metals prices.
IGO's Company Secretary, Kelly Ross said the market was significantly undervaluing the company's assets and growth prospects because nickel could not go much lower with nickel laterite producers already cutting production and delaying projects.
IGO, which focuses on higher grade nickel sulfide mining, is buying back up to 11.5 million shares over a 12 month period, out of a total float of 117 million shares.
IGO closed at A$2.85 Thursday, up 1.8% from Tuesday's close, but 69% down from its 2008 high close of A$9.30 on Mar 7. Ross said IGO's cash costs had risen this year and were currently around US$3.91-US$4.00 a pound, but that level was still profitable. Based on Wednesday's LME three-month kerb, nickel is currently priced at US$9 a pound.
At 0730 GMT, three-month nickel on the London Metal Exchange was at $20,350, up $450 on Wednesday's PM kerb.
Given many West Australian nickel mining companies had similarly good balance sheet positions as IGO, there could be more buy back activity in the nickel mining sub-sector, said Robert Bishop, a mining analyst at Southern Cross Equities in Sydney.
But some others, such as Mincor Resources (MCR.AU), a high grade nickel miner based in Western Australia, say they have no immediate plans for a share buyback.
"The best use of our cash at the moment is to invest in our existing projects under development and our aggressive exploration program," said Mincor company secretary, Brian Lynn.
-By James Campbell, Dow Jones Newswires; 65-64154-082; [email protected]
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(END) Dow Jones Newswires
08-21-08 0454ET
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