Current nickel market - characteristics

Massive growth in Chinese consumption of nickel occurred in 2007, as production of stainless steel increased significantly. In this period, the world’s economy also witnessed strong demand growth for stainless steel from North America, Europe and Japan.

Hedge funds and large institutional traders played a significant role in triggering a short squeeze on the futures markets.

The nickel price was as high as $US50,000 per tonne. Today, three month nickel trades about $US9500 per tonne. Nickel is down more than 80 percent since a record of $US51,800 per tonne in May 2007. Nickel prices on the London Metal Exchange have fallen 82% from their record high hit in May 2007. In October alone, nickel prices have fallen as much as 44%.
Stainless steel producers, including China, Japan, and South Korea, started making investments in new technologies. Some steel producers used nickel free stainless steel, known as the 400 series, further driving down demand for nickel.

Stainless markets have also weakened, in turn dragging down demand for nickel with it.

Trends in the nickel market

• Faced with slumping demand from steel mills and a falling nickel price and demand producers will slash output further and also slow new capacity coming on-stream, particularly for marginal mines.

• Current nickel prices are below break-even level for some miners. Average production costs are estimated at $10,500-$11,000 per tonne, and around $15,000 for the highest cost producers.

• It is estimated that some 40 percent of the nickel industry maybe losing money. Ongoing closures can be expected

• On the plus side for nickel, there are an estimated three billion people in Asia who want to claw their way up the consumption ladder and the global turmoil will not likely change the long term trend.

• It is likely that another downturn in exploration in underway which will mean a repeat of 2002 of under-investment followed by another upsurge and resources boom

• Any disruption in major nickel producing mines or delays in current nickel projects could create a short-term situation where demand would outpace supply. Should this happen, we may see spikes in the nickel price rise. As traders and speculators in commodities have become major players in influencing short-term prices.

• The junior end of the market will struggle over the next year, with little capital available to conduct exploration

• Project development funding will be difficult to come by

• Supply is likely to keep falling significantly as high-cost producers struggle to survive the current low nickel price environment

• The nickel market may follow historical trends. Demand for nickel was negatively impacted by the 1982 economic recession, the 1997 Asian crisis, and the 2001 economic recession. As a result of the above factors, nickel prices were depressed at or below the US$5/lb level for a long period prior to 2003.

• Growth in Chinese car sales has been much slower than expected this year, and sales could be flat next year, after several years of double digit growth.

• Government moves to stimulate the local property market, which has suffered its own downturn in recent months, are expected to take at least six months to feed through into increased steel demand from construction, industry analysts said.

Recent news
Although priced in dollars, which has recently risen against currencies such as the Australian dollar, nickel producers in those countries are unlikely to be shielded from the downturn forever. Similarly, Australian nickel producers have been shielded somewhat from the nickel price fall due to the fall in the Australian dollar.

Much of the selling in the nickel market was not due to fundamentals, there had been hedge funds and other hot money rushing to get out of the market. Global consumption of nickel dropped for a fifth straight month in August to the lowest since September 2007.