Global Metals Weekly

Nickel prices below the intra-year peak

Nickel prices have corrected recently. This was influenced by a host of factors, including apprehension among both commercial and non-commercial market participants over the strength and sustainability of the global economic recovery. These concerns were partially driven by uncertainty over the impact the removal especially of the fiscal stimulus in many countries will have on economic growth given the general weakness of the private sector.


Headwinds have increased for cyclical metals

Headwinds for the cyclical industrial metals have certainly increased. This is reflected in the BofAML cycle dial, which shows that fund managers believe the economy has moved out of early and into mid-cycle. This stage of the cycle is normally less bullish for the metals (although it does not necessarily imply an end to price rises), partially because demand growth is often somewhat more subdued. Our economics team also expects that global GDP is set to expand by a somewhat weaker 4.2% YoY in 2011, compared to 4.5% this year.


Nickel output underperformed, while demand strengthened

Sharp nickel price rises in 1H10 were influenced by a tightening of the nickel market on an impressive rebound of activity in the stainless sector, after sharp production cuts had been implemented in late 2008 and early 2009. At the same time, refined nickel production generally underperformed at a multitude of operations including Vale's Canadian sites, Talvivaara and Murrin Murrin. Against this backdrop, we reinforce our expectations that the nickel market will be in deficit in 2010 and maintain our price forecasts from March 2010.


The forward curve is flattening

Yet, heavily influenced also by a seasonal slowdown in activity, stainless steel orders have fallen of late in many countries and this prompted output cuts at stainless steel mills. At the same time, there was news that more nickel supply may be coming through in 2H10. The combination of these two factors has been a key driver of the recent flattening in the nickel forward curve, in our view. One of our fair value models suggests that the C-27M (Cash to 27 months) time spread remains overvalued and we believe there is scope for the backwardation at the back-end of the curve to ease further during the summer months.

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Research report