METALS COMMENTARY — Stainless steel growth good for nickel

Stainless steel represents at least 60% — and maybe as high as 70% — of nickel consumption, and fairly steady growth seems certain in the near future. Production was up again in 1993, to about 11.4 million tonnes.

The overall growth in stainless has compensated for consumption drops in specific sectors, particularly those related to the military and to commercial airlines. It has also sopped up an unknown amount of Russian “nickel scrap” exported mostly to Western European countries which, for several years, ceased to buy significant quantities of stainless scrap. In 1993, U.S. virgin nickel consumption returned to historical levels, with Europe and Japan having begun to show signs of improvement. The worldwide forecast for 1994 is 610,000-620,000 tonnes, virtually unchanged from 1992 and 1993 tonnages (but down from 670,000-680,000 tonnes in 1990-91). With 1994 Western production estimated at 540,000-550,000 tonnes and Russia expected to ship anywhere between 80,000 and 120,000 tonnes, it seems unlikely that stocks can decline substantially unless consumption recovers or more production is cut back.

Several puzzles remain in the world of nickel:

* The usual Russian shipment route into Rotterdam has been quiet, with few parcels arriving; however, the quantities of Russian cathode being put onto the London Metal Exchange (LME) continue unabated.

* More nickel is being consumed in the stainless steel sector, stainless scrap is in tight supply and Russian nickel shipments are at a trickle. Considering these three factors, it is indeed curious that total Western consumption of virgin nickel would be as low as it is. We can only assume that either Russian shipments are continuing or major structural changes are looming in non-steel nickel markets.

The recent bounce in metal prices has provided opportunities for producers, traders, consumers and investors to reset their metal positions. The net short-term result is a flood of metal onto exchanges when, in the case of lead and nickel, mine, smelter and refinery cutbacks should have begun to reduce exchange inventories.

If the net metal inflow is from speculators, it will quickly ebb and inventories will regain stability and begin declining. Yet this is not yet happening as (except for copper) the month-over-month volumes continue to grow.

If the metal inflow results from price-support operations in which refiners are returning previously removed or diverted material by taking long positions, then inventory growth will resume and prices will decline further until it stops.

Most of the current activity appears to be the result of investors speculating on market improvements later this year.

Average January LME nickel prices (with last month’s figures in parentheses) rose to US$2.53 (US$2.32) per lb. as inventories bounced up to 128,826 (124,104) tonnes.

In apprehensive but quieter markets, cobalt prices paused after their recent strong advances at US$21-23 per lb. Western brands are at US$23 (US$12), with Russian counterparts at US$19-20 (US$11).

Seasonally high battery demand, combined with falling inventory and refinery output, continued to keep LME lead prices ahead at US22.2 cents (US21.4 cents) per lb. as stocks jumped up to 321,150 (303,650) tonnes. Meanwhile, LME zinc stocks surged to 998,325 (906,700) tonnes as prices rose to US45.2 cents (US44.2 cents) per lb.

LME copper prices advanced also, reaching US81.9 cents (US78.1 cents) per lb. as the combination of inventories on the LME and the Commodity Exchange of New York declined slightly to 653,314 (666,655) tonnes, equivalent to about 3.5 weeks of consumption.

The decrease in copper inventories was the third consecutive monthly drop since the October, 1993, peak of 701,000 tonnes. It remains to be seen whether U.S. copper producers will attempt, as they did in 1993, to create a price floor on part of their production through the options market. Such activity by large suppliers can exaggerate price movements, create temporary price levels and generate interesting profits and losses for those unprepared. There are rumors that aluminum producers and the governments of aluminum-producing nations, including Russia, have reached an understanding about cutback tonnages in the order of 10%, or something equivalent to the LME inventory overhang. (Details are unavailable, as such agreements are illegal in some jurisdictions.)

— Jack Dupuis is a metals agent, broker and consultant specializing in the marketing of mining properties.