Commodity Strategist: Nickel Heads for Record Year
2005-03-10 13:14 (New York)
By Christopher Donville
March 10 (Bloomberg) -- Nickel prices are headed for a
record year because of growing demand for metals in China and
concern that new mines may not be developed fast enough, said
Canaccord Capital Inc. analyst Greg Barnes.
Prices on the London Metal Exchange, up 24 percent in the
past year, will average $14,616 a metric ton, or $6.63 a pound,
in 2005, up from a record $13,886 last year, the Toronto-based
analyst said in a March 3 research report. The forecast is up 8.5
percent from Barnes' prediction in January.
China's appetite for nickel, used to make stainless steel,
is straining global inventories, and some new supplies are
dependent upon ``junior producers that will face challenges in
financing billion-dollar projects,' said Barnes, 41, ranked
Canada's No. 2 mining and metals analyst in the past two years in
the Brendan Wood survey of institutional investors.
The rise in the price forecast comes as BHP Billiton, the
world's largest mining company, agreed on March 8 to buy WMC
Resources Ltd., the world's fifth-largest nickel producer, for
$7.3 billion. Noranda Inc., Canada's largest mining company,
yesterday agreed to pay C$3.05 billion ($2.53 billion) for the 41
percent of Falconbridge Ltd., the third-largest nickel producer,
it didn't already own.
Declining Inventories
The 4.8 percent rise in global nickel production expected
this year to 1.313 million tons won't be enough to prevent a
decline in global inventories of about 20,000 tons, said Barnes,
who graduated in 1986 from Queen's University in Kingston,
Ontario, with a degree in geology.
As recently as December, analysts had expected nickel prices
to be lower on average this year. Nickel for immediate delivery
was forecast to average of $13,000 this year, based on the median
estimate from 20 analysts surveyed since Dec. 15 by Bloomberg
News. Since then, prices are up 20 percent.
``We expect the nickel market will remain tightly supplied
for the next several years,' wrote Barnes, who also has a
Masters of Business Administration from Toronto's York
University.
Russia's OAO CMK Norilsk Nickel is the world's largest
nickel producer, followed by Toronto-based Inco Ltd.
``We haven't reached the top of the market yet,' Peter
Jones, Inco's president and chief operating officer, told
investors at a conference in New York yesterday.
Already Above Estimate
Prices already are above Barnes' targeted average for the
year, at $15,103.80 a ton. Prices reached a 14-year high of
$17,700 in January 2004. Prices today fell $145 to $15,955.
Nickel consumption in China expanded about 22 percent last
year, buoyed by a 25 percent rise in the fourth quarter as
stainless-steel makers sought to replenish inventories, Barnes
said.
China, which Barnes said consumes more stainless steel than
the U.S. and Japan combined, needs more nickel to keep up with
demand for metal to make everything from cutlery to office
furniture. Conventional stainless steel contains 8 percent or
more nickel to make it rustproof and more malleable.
``And despite rapid growth, Chinese stainless steel
production capacity remains well below consumption,' Barnes
wrote, adding that China consumed 3.2 kilograms (7.1 pounds) of
stainless steel per capita in 2003, compared with 21.6 kilograms
per capita in South Korea.
Chinese demand will eat up about 75 percent of planned
increases in supplies of nickel this year, Inco's Jones said.
Limiting Supplies
``The resurgence of Chinese nickel demand, the urgency of
high nickel alloy demand and limited nickel supplies will be key
drivers in 2005,' Jones said.
Demand is also rising elsewhere, Barnes said. ``We continue
to hear reports from nickel producers that demand in the United
States remains firm and that stainless-steel-producer order books
remain healthy,' he said.
Producers are planning to boost production with new mines.
Twenty projects with combined capital costs of $15.6 billion may
start producing over the next seven years, and may supply as much
as 621,000 tons of nickel a year, Barnes said.
Of the 20 projects, four will begin production this year,
including developments in Canada, New Caledonia, Spain and the
Philippines. Of the rest, four have been financially committed,
including Inco projects at Voisey's Bay in Canada and Goro in New
Caledonia, BHP Billiton Ltd.'s Ravensthorpe in Australia and
expansion of Inco's operations in Indonesia, Barnes said.
Uncommitted Projects
``The problem with this picture is that a significant
portion of the development pipeline has not been committed,' he
said.
Smaller mining companies that control development of a
number of projects may experience significant challenges in
arranging financial backing for projects requiring a total of
about $2 billion, he said.
``Dropping the uncommitted projects from our supply picture
makes a significant difference in the outlook for the nickel
market,' Barnes wrote, suggesting that his analysis points to a
``looming gap' between supply and demand starting in 2008.
--With reporting by Matthew Craze in London. Editor: Stroth,
Langan, Stroth.
