Consumption of refined nickel is likely to outpace production in 2010, leading to a small supply deficit with new supply side production eventually oversupplying the market in 2011.

World refined nickel production recovered from 2009 lows and should increase by 4.3% year over year in 2010, said UBS in a report. Production shared that growth with a rally in consumption of 11.2% and a strong pick up in global stainless steel production, which could lead to a supply deficit of 50,000 tons in 2010, the report said.

China, the world’s largest nickel consumer, will also be a key supply side factor driving prices lower. Chinese net imports were down 69% year over year in July and despite only recently falling to long-term average levels Chinese nickel pig iron production is expected to increase on the back of improved productivity and further upward integration at steel mills.

“This additional domestic NPI production helps China to reduce nickel imports, leading to low global nickel prices,” the report said.

UBS forecasts a 2010 average price of USD 20,000/mt and advises investors to clear existing positions at prices above USD$23,000/mt as excess demand is unlikely to persist.

While project delays could tighten demand, markets are likely to be oversupplied from 2011 onward, as additional production comes from new projects, said UBS.

Joshua Brown