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Stainless scrap, strike poser for nickel
Allan Seccombe
Posted: Fri, 26 May 2006

[miningmx.com] -- HIGH stainless steel scrap prices will bring more of the metal into the system, which could possibly bring nickel prices down from life highs, Troye Brady, a metals analyst with Nedcor Securities said on Friday.

Another price driver in the market is a potential strike at Inco, a leading producer of nickel. Seventy percent of nickel production is used in stainless steel. Nickel prices are around $22,500/tonne.

“A labour agreement should be concluded with Inco at the end of this month. If there is no strike, nickel prices could fall to below $20,000 a tonne. If there is a strike, prices could go to $25,000,” Troye told a Geological Society of South Africa conference on the metal.

The union representing workers at Inco's Sudbury, Ontario nickel operations said on Friday labour contract talks have reached a stalemate and that a strike is imminent, Reuters reported. "We think a strike's imminent," Wayne Fraser, a representative with the United Steelworkers union told the newswire. "We have notified our members that they ought to be getting ready for a strike."

Worries about the strike have led to exaggerated buying of the metal. London Metal Exchange stocks have fallen to a one-week supply situation. If producer and consumer stocks are added in, there is probably about four weeks supply, he said.
you will see guys going out and sourcing more scrap
However, in the longer term, scrap prices pose more profound complications for nickel supply and demand fundamentals as well as nickel prices, which are behind vanadium, palladium and oil in terms of volatility, he said.

Stainless steel scrap is preferred by steel makers because the nickel content is already blended. At the moment nickel is very expensive compared to scrap, which is also at high prices.

“With scrap prices between $10,000 and $15,000 a tonne you will see guys going out and sourcing more scrap, which will complicate things for the nickel market,” he said. “If prices go high enough, guys will steal exhausts off cars,” he joked.

With nickel prices as high as they are, and stainless steel production forecast to grow 9.6% this year after negative growth last year, nickel is surging onto the market.

“With growth like that and prices like that, it is a big attraction for producers. Nickel is coming out from everywhere. Everyone is looking for nickel and looking for ways to produce it,” he said. “If you are looking at nickel projects I strongly suggest you get them into production right now.”

“At the moment the downside risk for prices is quite high.”

An expected 330,000 tonnes of net new nickel production is expected by 2010. The global nickel market at the moment is 1.4 million tonnes per annum, he said.

The nickel market will show a 6,000 tonne deficit this year, a 4,000 tonne surplus in 2007 and then large surpluses of 35,000 and 24,000 tonnes in the following two years respectively, he said.

Stainless steel production is forecast to grow 4.7% next year and about 7.5% a year for the following two years.

The market for nickel is showing a widening backwardation, which occurs when spot prices are higher than futures prices.

It shows consumers are prepared to pay a premium for nickel now, but that prices 15 months out are expected to be significantly lower than current levels, Brady said.

A lot of froth in nickel prices has come from speculators and hedge funds pouring money into the commodity markets. An estimated $80bn was pumped into commodity index funds in 2005 and this is forecast to grow to $110bn to $120bn by the end of this year. This would represent fourfold growth from 2003 levels.