Nickel prices at five-year low as demand from stainless steel mills collapses

There's plenty of cheap nickel available to buyers and no sign that trend will change anytime soon. Economists now suggest that the freefall in the nickel price to $5.26/lb in early November will continue next year, with nickel prices likely to plunge as low as $4.50 in some weeks as the global economic downturn intensifies. These would be the lowest for nickel prices since the second half of 2003.

The worldwide industrial production slowdown has reduced nickel purchases from stainless steel mills in the U.S., Europe and Asia. This, in turn, has crushed demand for the alloying metal—as reflected in collapsed prices and increased inventories—"as fears continue to mount among producers and traders about both the depth and duration of the current manufacturing downturn," says analyst Edward Meir at MF Global in New York.

Good news for buyers, Meir says, is that the world nickel markets "are still very fragile, and price rallies remain vulnerable." Nickel inventories on the London Metal Exchange (LME) increased to an average 58,000 metric tons in early November—more than 19,000 metric tons that expected by analysts. And now, TD Newcrest metals analyst Greg Barnes in Toronto has predicted that the nickel surplus will stay high in 2009 because of some new mines, smelters and refineries still scheduled to start production in late 2008 and early 2009.

The world price for nickel on the LME averaged $5.51/lb in October, which is a drop of 53% since the start of the year and the largest price decline since 1988. Analyst John Mothersole at Global Insight's offices in Washington says that nickel below $7.70/lb "has increasingly threatened the profitability at high-cost operations." CLSA Asia-Pacific Markets analyst Ahmad Solihin in Hong Kong says in a report that a lot of nickel companies would be booking losses if making sales at current nickel prices. So, global producers have announced supply cutbacks totaling about 140,000 metric tons this year and another 100,000 tons for next year, reports analyst Adam Rowley at Macquarie Bank's offices in London.

"The market has needed substantial cuts and it needs delays in the start up of new capacity for prices to stop sliding and those are starting to come," says Rowley in a note to clients. He estimates that the global supply surplus will narrow to 20,000 metric tons next year from 30,000 metric tons this year and 95,000 metric tons last year. However, analyst William Adams at BaseMetals.com reckons that "the market is probably going to need more supply cutbacks" because of the expected depth and length of the world stainless steel recession.

The sustained sell-off in equities suggests that business confidence has sunk again, according to a recent statement by Roger Agnelli, CEO of global mining giant Vale of Brazil. He agrees that stainless steel demand has collapsed and no one knows for sure when it may start picking up because the global credit crunch is so severe that it has crushed sales of almost everything made from carbon and stainless steels.

"There are some parts of the world where people don't want to buy anything," Agnelli tells the Associated Press in Rio de Janeiro. "Nothing, nothing, nothing." So, Vale, a major nickel producer, has reduced ore processing at its Indonesian mines by 20% this quarter and is operating its cathode refinery in Dalian, China, at 35% of capacity.

Nickel sales are down because demand for stainless steel has crumbled as the financial market crisis is turning into a global economic rout. Nickel demand had been expected to increase by 5% this year and another 4% in 2009. Instead, nickel use is sliding by at least 6%, according to the International Nickel Study Group (INSG)'s latest market review—which also says the 2008 decline in world stainless steel production now is expected to continue well into 2009.

At the start of the year, GFMS Metals Consulting had expected a rebound in stainless steel markets by midsummer. "This has, of course, not happened and instead the global stainless steel sector has worsened," writes the London-based research house. "It now is considered unlikely that any material stainless steel demand improvement will take place this year," says the INSG report, which concludes that "any recovery in stainless steel production and primary nickel demand is not anticipated for until well into 2009."

Mothersole says "stainless mills continue to buy nickel hand to mouth this quarter since global production plans continually are being revised down." He and other analysts predict no improvement in world stainless steel production when this year's numbers are crunched. The consensus forecast is 27.75 million metric tons, as compared with 27.84 million in 2007.

And, looking ahead, worldwide demand and production for stainless steel will be flat, at best, during 2009, says CEO Lakshmi Mittal at ArcelorMittal, the world's largest steel producer. He says in a statement that he remains optimistic about the steel industry's medium-term growth prospects but that will require "a more settled economic outlook"—and was cautious about saying when that might happen.

With stainless steelmaking expected to remain weak outside China, analyst Rebecca McCallum at the Australian Bureau of Agricultural and Resource Economics (ABARE) in Canberra sees nickel output stuck at 1.42 million metric tons for the third straight year in 2009.

"However, demand for stainless steel, and hence for nickel, has continued to grow in China in parallel with demand for industrial and consumer uses of stainless steel and other nickel alloys," writes McCullum, who says Chinese nickel consumption growth is expected at 20% in 2008. China's government set plans for $586 billion in spending and stimulus measures through the end of 2010 in an effort to offset the impact of slowing global growth and unlock the spending power of its vast population.

"In 2009 world nickel consumption is forecast to increase by 3% to 1.39 million metric tons as consumption growth remains strong in China," McCullum writes, even if stable to down elsewhere.

Two U.S. Stainless steel sheet producers are furloughing production workers in the fourth quarter in the face of the manufacturing collapse that is cutting stainless steel purchasing by 7.5% this year.

Allegheny Technologies of Pittsburgh has confirmed that it is laying off 20% of the work force for an indefinite period at its Allegheny Ludlum subsidiary, which primarily makes flat-rolled stainless and specialty steels. AK Steel of West Chester, Ohio, is shuttering its Mansfield, Ohio, plant, which primarily makes stainless steel sheet, at least into January.

Neither AK Steel nor Allegheny Technologies specifically indicated that shutdowns and layoffs would be in their companies' futures during third-quarter financial calls with analysts. But they did say they planned to adjust production to the order books. The shutdowns came after the Specialty Steel Industry of North America released statistical data on consumption and import penetration for the first seven month of the year that were annualized by analysts into declined shipments of sheet, plate and wire products.

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