* Production problems constrain supply

* Demand for stainless steel rising as economy improves

* Sudbury strike ends, production picks up

By Sue Thomas

LONDON, July 20 (Reuters) - A surge in stainless steel demand, supply constraints and falling stocks will mean a nickel market deficit this year, but the shortfall is likely to narrow in 2011 as production rises, a Reuters survey showed.

The survey of 17 metal analysts carried out over the last four weeks showed the nickel market was expected to see a deficit of 32,000 tonnes in 2010. In the January survey expectations were for a surplus of 15,000 tonnes.

"Demand for stainless steel has experienced a very strong recovery, to the benefit of nickel prices," said Nic Brown, an analyst at Natixis. Stainless steel accounts for two thirds of nickel demand.

Benchmark three months nickel futures CMNI3 on the London Metal Exchange are now around $19,000 a tonne from levels below $10,000 in February 2009.

Last year prices climbed 58 percent, helped by strong demand and supply disruptions, including an almost year-long strike at Brazilian company Vale's VALE5.SA Sudbury mine in Canada.

The strike, one of the longest and most acrimonious labour disputes in Canada's mining history, ended this month. Sudbury and Vale's Voisey's Bay nickel mine in eastern Canada produce about 10 percent of the world's nickel. ReutersLink ID='ID:nN08232775' /

"However...the upside in nickel is capped by potential supply of nickel pig iron," Brown said, referring to a new production process applied in China, for which there is abundant but unknown capacity.

"Nickel price gains will also be constrained by new supply -- return to full operation of Vale's Canadian operations in the short run."

Production at Voisey's Bay, where workers went on strike last August, is partially back on line.

But delays in production at Vale's new Goro mine in New Caledonia continue. In April, the company said it had halted commissioning work at the already delayed operation. ReutersLink ID='ID:nN26199328' /

The new $4.3 billion project, which is expected to eventually produce 60,000 tonnes of nickel a year, has been repeatedly delayed over the past 18 months.

"The failure of the Goro HPAL mine so far means the market will remain tight in 2011, when we forecast an essentially balanced market," Barclays Capital analyst Gayle Berry said.

The above is an indication of better times ahead for Noront.

Noront is a world class discovery.

We have a huge mineral rich area, where we have only scratched the surface.

Our day will come.

Sorento