Commodities: Nickel - The New Gold?
New York: June 22, 2004
By John R. Stephenson

Last week we saw resurgence in the all of the base metals with aluminum up some 5.3% for the week and copper up a healthy 3.0% on the week. But none of these base metals can compare with the strong performance for nickel whose price has surged some 36.4% in the past month and 15.9% in the last week alone.

The reason? Nickel supply is constrained with an approximate three-year wait for new worldwide capacity at a time of strong demand. The end use for all this nickel is primarily for the manufacturing of stainless steel which continues to grow at a very brisk pace, particularly in Asia. According to recent data from the International Stainless Steel Forum the output of stainless steel rose 6.9% (6.1 million tonnes) in the first quarter of this year with Asia output growing at 14.7% (2.9 million tonnes) in the same period.

Figure 1: Stainless and Heat Resisting Crude Steel Production

Source: ISSF

In our view, it is likely that this demand will remain strong while supply continues to remain tight. Chronic under-investment in nickel mining coupled with sluggish demand growth over the years has left us with too little supply to balance the surging demand. Although there is some relief in sight as Inco and BHP Bhilton (two large nickel producers) have large mines under development that should add some 5% to world supply by the end of 2007.

Normally, an economic system could be held in balance and prices held in check if there is sufficient inventory to ameliorate swings in demand. The problem this time around is that inventories of nickel on the London Metals Exchange ("LME") stand at 8,299 tonnes, a decline from the beginning of the year of 66%, and the lowest level since November of 1991. If you extrapolate the daily decline in nickel inventories that has been experienced since the beginning of May (207 tonnes per day), inventories of nickel on the LME will fall to zero in about 40 trading days. Although we may never reach the zero inventory situation, the strong fundamentals in the stainless steel market coupled with the shortage of inventories should further underpin the pricing of nickel for the next several months.

How should you play the potential for strong nickel prices? Well, one good name to keep your eye on is Inco Ltd. (N- NYSE) which is one of the preeminent nickel producers in the world.