Independent Nickel Corp (INI)

[goforthebet]

Production cuts and fund buying help Nickel

2009-05-09 13:00:38

In the month of April, Nickel prices gained sharply by 18.7%. Though steel demand is expected to remain weak, Nickel has found strong support and prices have rallied in the last few days. Since early April, prices have improved on the back of physical buying, investment demand and on short-covering. Investor confidence has seen renewed interest as investment and technical buying came in against a backdrop of rally across global equity markets.

This rise in Nickel prices is despite a rise in LME inventories by 46.6% on a year-to-date basis. Hence, this indicates that the real demand from the steel sector is still weak. The major cause for the rise in Nickel prices is the production cuts that are supporting prices amid a poor economic situation that has led to slowdown in demand. For 2009, global production cuts are expected to be around 20% of existing nickel production.

Development

Brazilian miner Vale has cut its global nickel output in order to adjust to the low demand amid a global economic downturn. The company has delayed the start-up of its nickel project in Brazil by at least one year, indicating that the demand is grim. Vale has also shut down its Sudbury nickel mines and processing plants in Ontario for eight weeks. Chinese refined Nickel imports declined month-on-month in March to 12,620 tonnes and underwhelming imports reflect the subdued situation of the domestic Chinese stainless steel demand.

Chinese stainless steel exports have been affected in recent months due to the threat of anti-dumping measures in Europe. On the other hand, European units are buying Nickel on a spot basis to meet hand-to-mouth needs. European steel mills are expected to remain under pressure in the next quarter and this could also put pressure on Nickel prices.

Nickel inventories gained more than 15% year-to-date

On a year-to-date basis, Nickel inventories on the LME have gained more than 45%. This is despite the production cutbacks as overall demand scenario is weak. On a month-on-month basis, inventories jumped almost 7% in April. The rising trend in inventories is a clear indicator of low demand.

Fundamental View

Stainless steel producers account for around 64% of nickel offtake, and they are struggling with new orders which are at all time lows right now. Severe production cuts have pulled out around 20% of nickel supply from the market and this is the real cause for the rise in prices rather than improvement in demand.

We feel that Nickel prices could feel pressure on the downside in the coming months as supply overwhelms demand. This is because of a weak stainless steel market. Despite cutback announcements by Vale the nickel market remains in ignificant oversupply. Prices have mainly rallied on the back of short-covering, investment buying, weaker dollar, stronger equity markets and a general lift up in sentiments. In the coming months too there may not be a sharp rise in demand as European and US stainless steel mills continue to operate below 50% of capacity and the pick-up in Chinese production is slowing.

The demand situation is still poor but prices could still receive support as a large number of nickel smelters have announced production cutbacks. Hence, the short-term trend in Nickel looks bullish. However, real recovery in demand from the steel sector could come in only by the end of this year of beginning of 2010. Until then, prices could receive support due to production cutbacks.

http://www.commodityonline.com/futures-trading/technical/Production-cuts-and-fund-buying-help-Nickel-10451.html