NICKEL HIGH By VIKAS BAJAJ
Published in New York: August 18, 2006
Considered bewitching by miners in Saxony who got skin rashes from handling it hundreds of years ago, nickel has recently cast a spell of a different sort on world financial markets.
This week, the metal’s surging price and falling stockpiles prompted the London Metal Exchange to impose restrictions on its trading, warning that “we now have a genuine material shortage.”
Since the start of the year, nickel supplies in warehouses approved by the exchange have fallen 83 percent while the price has risen 105 percent, the greatest increase among base metals.
In London yesterday, prices of nickel futures dropped 5 percent, to $27,700 a metric ton, suggesting that the exchange’s restrictions were having some effect.
Like other commodities, the price of nickel — which is used in making stainless steel, among other things — has been on a steep, rising curve in the last three years as producers have been unable to keep up with the voracious appetite of China, and to a lesser extent, India, for metals and other materials on which industrial economies are built.
And with most of the easiest deposits already tapped, mining companies are having to venture deep and far to obtain metals like copper, zinc and nickel.
After a brief slump in June, nickel prices rose steadily and began surging early this month as rumors swirled in London that a big buyer had made a substantial bet that the price of the metal would fall by selling 10,000 metric tons of it short. One report identified the seller as Posco, a large South Korean steel maker, but the company denied that.
In short sales, investors sell a borrowed commodity or a stock that they believe they will be able to buy later at a lower price. If the price falls, the trader can make a handsome profit. But if prices continue to rise, the seller must scramble to return the borrowed stock or seek to delay delivery, both of which can deal the trader a substantial and theoretically unlimited loss. If the bet is big enough, the seller’s desperation to buy can itself propel prices higher.
It may be impossible to know who sold how much nickel short, and “it’s not actually that relevant,” said Kevin Norrish, an analyst with Barclays Capital. He contends that nickel’s price is being driven up by fundamental factors. In a report released this week, the International Nickel Study Group, an organization of producing countries, said that demand for the metal was exceeding current production levels.
And Mr. Norrish added, “You have got lower production coming through than people had expected.”
To ease supplies in the short run, the London Metal Exchange beginning today, has imposed a daily limit of $300 a metric ton on how much short sellers have to pay to delay delivery of any nickel they have borrowed that is due to be returned. Previously, the price to delay delivery was set by the market and could run into thousands of dollars a ton. “It helps the market to operate in an orderly fashion without getting out of control,” a spokesman for the exchange, Adam Robinson, said.
The making of stainless steel takes up two-thirds of nickel production, with the rest going into aerospace, batteries and other uses. (The use of nickel in coins is minimal, and it makes up just 25 percent of the coin that bears its name; copper makes up most of it.)
Russia is the largest supplier of the metal, followed by Canada and Australia, but increasingly mining companies are looking to places like Indonesia and New Caledonia, a South Pacific island group long associated with the nickel trade.
In 2005, worldwide nickel production rose 7 percent, to 1.5 million tons, but output this year is slowing because of disruptions and delays at some big mines and production operations.
In the meantime, the strong global economy and a boom in new steel plants in China, India and elsewhere have kept the demand for nickel robust and rising. Steel makers can substitute chrome and manganese for nickel if prices climb too high and mining companies are unable to keep up with demand, but that does not appear to be happening thus far, said Neil Buxton, an analyst with GFMS Metals Consulting in London.
Jeremy Goldwyn, head of industrial commodities at Sucden, a London commodities broker, said the big question on most traders’ minds was, Once this short-term situation dissipates, will the underlying prices fall sharply as well?
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