In early June, world spot nickel prices were around US$22 000 a tonne — significantly higher than the 2005 average price of US$14 750 a tonne. Nickel prices are forecast to average about US$16 600 a tonne in 2006, 13 per cent higher than in the previous year. The forecast rise in prices during 2006 reflects a recovery in stainless steel production (the major end use for nickel), rising consumption of stainless steel in China and limits on supply that is susceptible to disruption from labor disputes.
nickel prices to average higher in 2006
Stainless steel production accounts for about 65 per cent of world nickel use, which makes the nickel industry highly dependent on developments in world stainless steel markets.
Stainless steel production fell in the second half of 2005 as steel producers reduced stocks. In the September quarter 2005, stainless steel production fell by 25 per cent in western Europe, 19 per cent in the Americas and 9 per cent in Asia. The associated drop in demand for nickel from steel producers led to the spot price of nickel declining from US$17 750 in May 2005 to US$11 500 in November.
In the first five months of 2006, however, world nickel prices averaged over $16 600 a tonne, 13 per cent higher than the average for 2005. The main reason for the increase was a recovery in stainless steel production in the first half of 2006. Increased interest in nickel by speculators and investment funds are likely to have added to the rise in prices this year. However, the nature of their operations means that prices could also fall rapidly if funds decide to substantially reduce holdings.
Contributing to the rise in nickel prices in the first part of 2006 were concerns about the possibility of a labor strike at Inco’s Sudbury nickel mine and smelter in Canada when the labor contract expired at the end of May. As a precaution against possible supply disruptions, stainless steel producers and other nickel users moved to increase stocks, thus adding to pressure on spot prices. Nickel prices fell by over US$1500 a tonne in the week after the possibility of a strike was averted.
The accumulation of nickel stocks by stainless steel producers has caused stocks held on the London Metal Exchange to more than halve during the first five months of the year. However, according to the International Nickel Study Group, total western world nickel stocks — the sum of stocks held by producers, consumers and exchanges — have remained fairly stable since the end of 2005.
In China, continuing growth in infrastructure development, construction and manufacturing is expected to be the main feature of rising world stainless steel consumption in 2006. Increased stainless steel production can be expected to translate into higher demand for nickel.
Despite the strong underlying demand for stainless steel, and hence nickel, prices are expected to fall in 2007. This is largely because production is forecast to exceed world consumption by a small amount again next year as new capacity comes on line. From a historical perspective, nickel prices in real terms currently appear high relative to previous times when stocks have been low in terms of weeks of world consumption.
Further, the commissioning of new mines in 2007 should remove some uncertainty about future supply and place downward pressure on prices. Overall, the world nickel price is forecast to average around US$13 700 a tonne in 2007, 18 per cent lower than in 2006.
recovery in world nickel consumption
Following a dip in 2005, world nickel consumption is forecast to rise by 8 per cent in 2006 and a further 6 per cent in 2007 to 1.35 million tonnes and 1.42 million tonnes respectively.
Increasing world consumption of stainless steel in 2006 is being driven in large part by China’s continued rapid economic expansion. China’s economic and industrial growth is leading to increased infrastructure development and expansion in the construction and manufacturing sectors, all of which are intensive users of stainless steel.
The expanding sectors in China tend to use higher nickel content 300 series stainless steels rather than lower nickel content 200 series. China’s consumption pattern is reflecting this trend, which will provide further support for higher nickel consumption in China. Given the growing importance of China in the world economy, the move toward 300 series stainless steels, if sustained, may cause the world austenitic ratio — the proportion of stainless steel that contains nickel — to increase over the medium term.
Strong economic growth in the rest of the world will also support nickel consumption. All major economies in north America and Europe are expecting stronger growth in 2006 compared with 2005. This should ensure that there is growth in the world construction and manufacturing sectors, which will flow through to nickel demand.
A report by the US Department of Commerce showed that construction activity in the United States increased by 0.9 per cent in the March quarter. This was higher than expected and is thought to reflect, in part, rebuilding activity in New Orleans. There is also strong demand in other end uses for nickel such as aerospace and electronics.
Potential dampeners on demand are the recent rises in interest rates by the US Federal Reserve, the European Central Bank and the People’s Bank of China. Such policies may act to constrain economic growth and cause the rate of growth in nickel consumption to slow.
Record nominal prices for nickel may also curtail consumption, as occurred in 2005. When prices exceeded US$17 000 a tonne last year, consumers substituted lower nickel content 200 series stainless steel for higher nickel content 300 series stainless steel. However, as 200 series proved to be largely unsuccessful in many applications, this type of short term substitution may not occur again.
mine and refined production to continue rising
After growing by around 5 per cent to 1.37 million tonnes in 2005, world mine production is expected to rise again in 2006. The ramping up of Inco’s Voisey Bay nickel mine in Canada (55 500 tonnes a year capacity) will be the main source of new nickel mine production.
Production is expected to rise further in 2007, with much of the increase expected to come from the startup of BHP Billiton’s Ravensthorpe mine in Western Australia (50 000 tonnes capacity) and Inco’s Goro mine in New Caledonia (60 000 tonnes capacity).
Since Inco’s Goro mine is scheduled to begin production in late 2007, this project’s contribution to world mine output in 2007 will be limited. Further, the project has been plagued by protests that caused construction to be halted for most of April. Consequently it is possible that this project will not be commissioned until 2008.
Global production of refined nickel is forecast to increase by over 5 per cent to 1.35 million tonnes in 2006 and by 6 per cent to 1.43 million tonnes in 2007.
The increase in refined nickel output in 2006 and 2007 will be assisted by the expected higher mine production that will enable existing nickel smelters to operate at close to full capacity.
production lower in Australia in 2005-06 …
Domestic mine production is estimated to have fallen by 5 per cent to 184 000 tonnes in 2005-06. The main reason for this was cyclone activity and generally wet weather in Western Australia during the March quarter. In particular, BHP Billiton reported that March quarter production from its Nickel West operation was 10 000 tonnes lower than in the December quarter.
Australian refined and intermediate production is estimated to have fallen by 7 per cent to 224 000 tonnes in 2005-06 as a consequence of the lower mine output.
Production from Queensland Nickel’s Yabulu refinery fell because of lower mine production in New Caledonia, the source of its nickel feedstock. Expansion activities at the Yabulu refinery are also restricting production.
Lower mine and refined production has also flowed through to nickel exports in 2005-06. In particular, the volume of refined and intermediate nickel exports is estimated to have fallen by 5 per cent to 204 000 tonnes. However, higher nickel prices have ensured that the value of exports is little changed.
… but recovery expected in 2006-07
Australian mine production is forecast to rise by 15 per cent to around 212 000 tonnes in 2006-07. This increase reflects the anticipated startup of Consolidated Mineral’s East Alpha mine in mid-2006 (annual capacity of 9000 tonnes) and completion of LionOre’s Maggie Hays mine upgrade. It is also assumed that mine production from Western Australia will return to normal in 2006-07 after being affected by wet weather in 2005-06.
In 2006-07, a recovery in mine production should flow through to increased production of refined and intermediate nickel, which is forecast to rise by about 13 per cent to 254 000 tonnes. The increased output is expected to flow through to higher nickel exports. Shipments of nickel are forecast to rise by almost 14 per cent to 232 000 tonnes, valued at around $4.2 billion — 16 per cent higher than for the year just ended.
rohan kendall | +61 2 6272 2088 | 