Hunting for nickel
Date :August 28, 2003
By Rob Davies
Apparently it is the hunting season in Canada. Exactly who is hunting for what is not clear to me but it is evidently very important to the Canadian way of life. So much so that it seems to have become the primary factor in the strike at Inco?s operation at Sudbury in Canada. Now in its eleventh week this strike has sharply reduced the flow of metal into world markets causing another drop in inventories and provided the excuse to take the nickel almost to US$10,000 a tonne. The last time the price was at this mark was at the turn of the millennium when global liquidity was very high and many asset prices were at record levels. Unfortunately, property and bonds apart, those prices simply remain a fond memory for most investors.
There are fewer grounds for thinking that we are going to get a similar sell-off this time, at least in nickel. The strike, and longer-term production problems at mines using new technology, has limited the flow of new metal at the same time that the demand for nickel has been strong. Much of the increased requirement for nickel has come from the booming Chinese economy. It is estimated that this one region alone nowaccounts for 20 per cent of world nickel consumption.
These solid fundamentals have resulted in nickel stocks falling to 16,700 tonnes, a figure that contrasts starkly with the 48,000 tonnes the last time prices were this high, three and a half years ago. While there is a risk that the Canadians get bored of shooting small birds with big guns and go back to work, thus reinstating 9 per cent of the world?s nickel production, other factors are likely to play a part in keeping prices up. Those low inventory levels mean that consumers have precious little alternative to paying full price for the metal. Low stocks would make it hard to borrow nickel and hope for prices to weaken later.
Furthermore, strength in share and bond prices suggests that the long awaited global economic recovery is here and that will increase consumption of all metals. It also improves sentiment. Thus, last week was a good opportunity for one respected metals analyst to say that he was revising up his nickel price forecast to US$11,465 a tonne for 2004 from the previous figure of US$9,920. Those changes to forecasts always have more impact when prices are rising than when they are falling, static or just plain weak. Forecasting a continuation of a new trend is a common practice in investment banking and is a good way to attract attention from the press and from clients. The foreign exchange market provides many examples of such practice.
It seems hard to credit now that it was only a few months ago that major investment banks were rapidly revising their dollar/euro exchange rate forecast. Then the rate had surged to US$1.20 and experts were forecasting it to go to US$1.50. Since then it has been in gradual decline and is now back down to US$1.08. Funnily enough you don?t hear so much about those bullish exchange rate forecasts now. But I suppose foreign exchange rate forecasters don?t have to factor the quality of the hunting season into their calculations like metals analysts do.
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