Although nickel prices dwell in the cellar, long term story more upbeat--BMO
BMO has cut its nickel price forecast 20% to $4.50/lb this year, advising that the price needed to balance supply with demand over the long term won't occur until 2013.
Posted: Monday , 06 Apr 2009
RENO, NV -
The combination of very poor demand and insufficient production cuts are expected to pull the nickel market into a material surplus of 36kt this year, prompting BMO Capital Markets to reduce nickel price forecasts by 20% to $4.60/lb this year and by 21% to $5.50/lb in 2010.
Inventories are projected to increase for the third consecutive year in 2009, keeping prices low until 2010, BMO Capital Markets Global Commodity Strategist Bart Melek forecast.
BMO expects nickel will trend upward to $8.50/lb by 2013-the price needed to balance supply with demand over the long term. Melek advised, ‘Both producer discipline and growing consumption are expected to rebalance supply/demand conditions toward equilibrium over the longer term."
Melek asserts that more mining production cuts are needed to stabilize market conditions. He forecasts that nickel consumption will drop 10.6% to 1.17 Mt this year, while supply will likely decline 13.7% to 1.21 Mt.
"Given the weakness in nickel demand, the planned sharp production cuts will only turn a potentially large nickel surplus into a decreasing supply overhang this year-not a balanced market," Melek said. "More producer restraint must be forthcoming if prices are to stabilize in the medium term. Producers not only need to balance supply with demand, but they must unwind inventories as well."
BMO suggests that high nickel inventories may be a multi-year problem. Melek forecasts a poor nickel outlook for the next 18 months "amid credit-crisis-induced slump and plunging stainless melting rates.
Melek noted that the price of nickel "has already fallen well below the marginal costs of production with the majority of the global nickel universe and 60% of the BMO coverage universe posting costs above the current price. Of course, this is an untenable situation in the long term."
As most nickel producers are losing money in a very tight credit environment and difficult capital market, BMO expects a "hefty supply-side response," accounting for 25% of 2008 production.
"Indeed, nickel producers have announced some of the deepest cuts of refined metal output in the base metals ever, totaling some 360 ktpa for 2009."
The good news is that the lethargic supply growth will prove to be a key factor supporting long-term nickel price, according to Melek., who suggests that "many currently proposed projects will never be developed and existing facilities will continue to cut production."
"The BMO view is that very few, if any, unfunded projects will begin in the next two years and that only a fraction of high probable (fully funded) projects will fulfill their stated timetables."
In addition to outright production cuts, the schedules for planned closures are being pushed forward, expansions being delayed and new project develop curbed. "The industry is projected to keep supply growth under control until 2012 in order to erode the inventory builds that occurred in 2007, 2008 and 2009. Following three years of deficits, BMO projects a return to balanced conditions starting in 2013."
Melek suggests "the further out you go," the better the fundamental commodities picture looks. "With the developing world set to keep nickel demand growing and with a recovery in the western world, BMO expects nickel consumption in 2010 through 2018 to return to an approximately 3.7% annual rate of growth."
"The long-term nickel price story also remains upbeat as the need for massive infrastructure spending associated with industrialization and urbanization in the developing world is expected to accelerate after the global recession is a memory," Melek concluded.