By Eric Onstad

LONDON, Nov 30 (Reuters) - Nickel prices may see a short-term lift over the next several months due to a seasonal rise in demand for stainless steel, but next year's outlook is burdened by another market surplus.

Nickel, a component in stainless steel, has already seen benchmark prices on the London Metal Exchange shake off a weak performance this year, running ahead of other metals in recent weeks.

This may persist into early next year, but prices will soon be overwhelmed by output from major new mines gearing up and a surge in Chinese pig iron output fuelled by cheap Asian ore.

"There could be a little bit of seasonal pick up, but I struggle to see how nickel prices can improve significantly next year," said Nic Brown, head of commodities research at Natixis in London.

"You are going to get substantial amounts of cheap nickel ore coming from both Indonesia and the Philippines, as things currently stand, on top of the additional supply from some of these big nickel projects around the world."

So far this year, three-month nickel is the worst performer of six LME base metals, dropping about 8 percent, burdened by high inventories and a market surplus. It has lost two-thirds of its value since hitting a peak of $51,800 a tonne in May 2007.

But over the past two weeks, nickel has been the strongest, outperforming its peers by over six percent.

SEASONAL BOOST

Traders say the current strength is mainly due to some investors buying back short positions, but analyst Daniel Brebner at Deutsche Bank in London said seasonal factors in stainless steel may also bolster prices.

Over the past four years, stainless steel prices in Europe have risen around the beginning of the year, due to seasonal buying and this has corresponded to higher nickel prices in December and January, he said.

About 65 percent of nickel is used as an alloy in stainless steel production to make it resistant to corrosion, according to the International Nickel Study Group (INSG).

"Despite our long-term term concerns with respect to the nickel market... improvement in overall physical conditions over the next couple of months, in addition to favourable seasonality trends could see the nickel price move off recent lows," Brebner said in a recent note.

Three month nickel was trading around $17,230 a tonne on Friday morning, up from a low of $15,800 on Nov. 16.

PERSISTENT SURPLUSES

After any seasonal lift, however, an over supplied market is expected to weigh on prices.

The global nickel market was in surplus by 59,800 tonnes in the first nine months of the year, the INSG said, and Brown at Natixis forecasts a surplus of 44,000 tonnes this year, rising to 66,000 tonnes in 2013.

LME nickel stocks MNISTX-TOTAL have ballooned this year by 50 percent to 136,356 tonnes.

Analyst Jim Lennon at Macquarie in London recently came back from China, which accounts for 44 percent of nickel demand and where the nickel pig iron (NPI) sector has expanded.

"I've become more pessimistic about the market than I was two months ago... The market is going to remain in surplus for some time to come."

The amount of Chinese NPI coming on stream is much higher than previously estimated after China has invested $6 billion to $7 billion in building modern electric furnaces for the sector, Lennon said.

The more efficient smelters have lowered the break-even costs for the Chinese industry by about $3,000 per tonne to $13,000-$15,000, allowing it to withstand lower market prices, he added.

The Chinese industry will also benefit as shipments of nickel ore from Indonesia are expected to surge next year as Indonesian producers maximise exports ahead of a law that bans shipments of unprocessed raw materials from 2014.

Elsewhere, supply is due to grow from the ramp-up of big new projects, such as Sherritt International's Ambatovy mine in Madagascar, which is due to go into commercial production early next year and targets output of 60,000 tonnes a year.

Several new projects have been hit by operational problems, such as Anglo American's $1.9 billion Barro Alto mine in Brazil, which launched last year but is still below full capacity. Analysts at Morgan Stanley said repairs could take a year.

"We've repeatedly seen new production from nickel, particularly from the high-pressure acid-leach operations, disappoint market expectations," said Ross Strachan, commodities economist at Capital Economics in London.

"That said, given the poor state of demand, we still would anticipate there to be a continued surplus in the nickel market."

Strachan expects prices to end next year at $13,500 a tonne, while Lennon said the downside was limited to around $15,000 where miners would be hit hard.

Brown sees an average nickel price next year of $18,750, expecting all metals to be lifted by stronger global growth, but with nickel lagging the rest. (Reporting by Eric Onstad, editing by William Hardy)