Nickel's glitter turning to dross
TARA WALTON/TORONTO STAR
thestar.com
Economic growth fears have slashed more than half from metal's price
May 28, 2008 04:30 AM
Lisa Wright
Business Reporter
Only a year ago, nickel prices were soaring into the stratosphere in the wake of the twin takeovers of former Canadian producers Inco and Falconbridge and amid a sense that China's rapid development would gobble up every available pound of the metal used to make stainless steel.
But fast-forward to today and nickel is in a bit of a pickle. And some of nickel's base-metal buddies, such as zinc and lead, are getting caught in the crunch, too.
The spot nickel price hit a record $24.27 (U.S.) a pound on May 22 of last year. Now, though, the price has fallen by more than half as inventories near peak levels and traders look to more supply coming on stream with last week's opening of BHP Billiton's long-awaited Ravensthorpe project in Australia.
"There are no major supply disruptions and there's been a weakening in demand leading into the summer months," says analyst Barry Allan of Research Capital Corp.
He notes some of the weakness is seasonal. The old investment adage of "sell in May and go away" has applied in particular to nickel, which has been leading the pack in recent years during this so-called super cycle in metals.
Bold predictions said nickel would keep on soaring after Brazilian miner Vale took over Toronto's Inco and Xstrata PLC took over Falconbridge in 2006. Now, however, the metal is looking a little rusty.
It has been trading in the $13 to $16 a pound range on the London Metals Exchange for the last six months, and then sank to its lowest in two years on Friday, to $10.13. Nickel closed yesterday at $10.56, or $23,350 a tonne, a drop of 17 per cent so far this month.
Part of the reason is weakening demand from stainless steel producers, which are using their existing nickel stocks to make everything from cookware to cars. Stainless steel accounts for two-thirds of nickel's end use.
"No one wants to overstock heading into the summer," Allan says.
Also, easing off and profit-taking are natural after the protracted bull run in metals and metal stocks, he noted.
Other base metals are following nickel down. Zinc, for instance, sits at a two-year low of 97 cents a pound. Lead, which is at its lowest level in a year, cost 92 cents a pound yesterday.
"Without a doubt, it's a pretty consolidated move down," says analyst John Hughes of Desjardins Securities.
"The catalyst for the sell-off is due to the spreading of inflation contagion" as oil prices skyrocketed, he says. It's also the eighth time in the last 11 years that traders have sold off base metals in May.
"It's fear-driven related to slowing economic growth worldwide. It's been much easier to trade metals down on the back of concerns of a slowing economy."
But the base-metals bunch can see there are some silver linings. The price of construction metal copper has come off all-time highs of just more than $4 a pound but has still been holding pretty steady, closing at $3.79 a pound yesterday. Aluminum is the most resilient in the group these days at $1.34, roughly the same price as a year ago.
Allan points out that, with the Beijing Olympics starting in August, China's government plans to slow industrial output through the summer, shutting down a slew of blast furnaces that crank out the low-quality nickel substitute pig iron. The oversupply of that has helped hammer the nickel price.
The move is aimed at cutting down on the city's visible, chronic smog problem, but could also lead to a brief recovery in nickel prices by late summer as supply and demand come into better balance.
The nickel price still isn't anywhere near rock bottom though, says Allan. Nickel was hovering in the $5 a pound range two and a half years ago, and around $4 five years ago.
Meanwhile, the Ravensthorpe nickel laterite mine southeast of Perth is ramping up for annual nickel production of 50,000 tonnes by 2010. The project is considered a gamble for BHP, because laterite projects require a lot more processing and energy input than traditional nickel sulphide deposits. Also, perfecting the treatment process has proved to be a headache at some mines in the past.
Vancouver's Teck Cominco Ltd., the world's second-largest zinc producer, said last week that falling zinc prices will prompt companies to shut mines, cutting global supplies in 18 months from a current surplus, which should reverse the decline of the metal.
Zinc, which is used to galvanize steel, was the biggest loser on the London market last year because of oversupply. |
