BASE METALS

Strong 3-6 months for nickel, then supply growth to hit; iron ore outlook positive

While the nickel market looks firm in the near term, Macquarie analysts report that longer term supply growth could impact prices. Iron ore prospects look good for the time being.

Author: Lawrence Williams
Posted: Monday , 04 Oct 2010

LONDON - 

Macquarie Bank's China Commodities reserach team has come back from two major specialised conferences last week with the feeling that short term prospects for nickel remain bullish, but as new supply ramps up, the medium term outlook is perhaps not so favourable.  On iron ore, the Macquarie analysts felt that the immediate outlook remained positive.

NICKEL

Given the slow ramp-up of new nickel projects coming next year and the strong recovery of stainless steel production worldwide, especially in the Asia market, near term prospects for the alloying metal remain positive, but there are serious concerns about the substantial rise in nickel supply from the western world from 2H11 onwards.

Meanwhile, Macquarie reckons that global stainless steel producers are raising production with large mills running at over 95% capacity utilization at present compared with less than 85% during the summer. Chinese mill representatives the team spoke to reported full order books for 4Q10, with strong sequential growth from the machinery, construction and the appliance industries.

They reported there was wide discussion at the conference about the government effort to shut down nickel pig iron (NPI) producers especially. It is believed that 70-80% of small-scale blast furnace operations (less than 300 cubic meters) in Shanxi have been closed off, while more than 50% of the "inefficient" NPI producers in Shandong have been phased out as required by the central government policy.  Even so there could be some growth in NPI production overall if prices remain supportive.

It was widely agreed that current NPI production costs currently range from US$$8.1 to US$8.7/lb, with blast furnace producers standing at the higher end of the cost curve due to rising nickel ore and nickel prices and higher freight rates.

However, there are obviously growing concerns over increases in the western world nickel supply in 2011. The return of production from Vale's Sudbury and Voisey Bay operations in Canada after the year-long strikes and the gradual ramp-up of production from new projects will add at least a further 170-180kt of additional supply in 2011 compared to 2010. When combined with the estimated 30kt rise in Chinese NPI production next year, it appears there will be at least 200kt of incremental supply coming into the global market in 2011.

IRON ORE
Overall, Macquarie reports,  delegates at the CISA Steel and Raw materials conference were generally bullish on iron ore in 4Q and 2011, with all participants engaged with confirming that volumes taken from the seaborne market have not been impacted by a steel production drop-off in mid-September.

On the sidelines, purchasing managers from mills spoken to reported that forced energy efficiency-related production cuts were being lifted in the Tangshan and Handan areas of Hebei. Mills in these regions had received formal restart notices from the local government at the start of the week and are now in the process of ramping up production.