The following is the last of four instalments of The Commodity Refiner, published by London, U.K.-based Barclays Capital Research. This week we offer an overview of nickel and zinc markets.
Nickel
Volatility in nickel markets spurred prices higher than we had expected during the first quarter. However, we maintain our annual average price forecast of US$8,100 per tonne for this year.
In our view, the main concern remains the strength of end-use demand, but for now, stainless steel operating rates continue to rise, supporting strong demand for nickel. Consumption of primary nickel is receiving an additional boost from the continuous lack of scrap availability, even if there are attempts to improve or increase collection points of scrap material. The sharp downturn in capital expenditure in recent years suggests scrap will remain tight for the foreseeable future.
So far, stainless steel production has overall been strong. In Japan, melt output was about 15% higher, year over year, at the beginning of the year, and because of continuous strong exports to China, production rates are likely to remain high in Japan this year. Stainless steel mills in the region have been reporting healthy market conditions, which is surprising in light of the weak economic data coming out of Europe, though there are now signs that regional deliveries are slowing and shipments are likely to be redirected to Asia. Meanwhile, in the U.S. market there are also signs of stainless steel prices easing, partly on the back of a slowing auto sector.
Unlike the other base metal markets, this is not a market in need of production reductions. Instead, we regard the release of nickel held as a collateral loan by Norilsk Nickel as a healthy feature of this volatile market insofar as it helps dampen sharp price spikes (possibly damaging to demand), as recently evidenced when a further rise beyond US$9,000 per tonne (the highest since mid-2000) was prevented by sizable shipments into LME warehouses. As inventory drawdowns have since re-emerged, there has been good buying support around the lower numbers. However, the upside move is now likely to be more cautious, as funds might be keen to sell rallies in anticipation of further releases of Norilsk Nickel’s stockpiled material. However, the fact that 36,000 tonnes are being well-absorbed by the market must provide a bullish case for this market.
For our supply and demand calculations, we have assumed that Norilsk Nickel will feed more metal from its consignment stock into the market on another price spike, and we think it is likely that the full amount held as a collateral loan will have been released by 2004. When the company recently released details about its future production plans, it said any capital expenditure would be financed by internally generated funds, which possibly means that a similar stockpiling arrangement by the world’s largest nickel producer is unlikely to be repeated.
Apart from current strength in stainless steel production and the low availability of scrap, the other key positive remains the lack of new nickel capacity coming on-stream over the next few years. The recent extension, until July, of the review of the Goro nickel laterite project in New Caledonia renders future supply even more uncertain. We still assume Goro will start in 2006. For now, Inco is reportedly sold out while Falconbridge has no material available for spot sales, keeping physical premiums supported. However, as we expect nickel consumption growth rates to slow, we see market tightness easing beyond 2005.
While European and Asian stainless steel prices are trading more firmly, there are signs of softer U.S. stainless steel prices, reflecting weakness in underlying demand at times when stainless steel production rates are stronger. The correction in primary nickel prices at the end of the first quarter was not due to demand concern, but rather was the result of a partial release of Norilsk Nickel’s collateral loan. Operating rates at stainless steel mills in Asia and Europe continue to power ahead.
While inventory movements were highly volatile during the first quarter, the net change was an increase of 2,400 tonnes. Several London Metal Exchange (LME) warehouse locations have shown continuous declines (most notably Singapore and Baltimore), inventories have risen at Hull and Rotterdam, with the latter almost 10,000 tonnes higher since its recent trough of 5,400 tonnes on March 7. During this time, Norilsk Nickel confirmed the release of material held against a collateral loan. The start of the second quarter showed renewed sizable drawdowns, supporting a strong fundamental picture.
We estimate that total reported nickel inventories stood at 137,000 tonnes at the end of March, largely unchanged over the quarter despite great volatility in LME stocks. We expect inventories will maintain the overall declining trend in an environment of robust stainless steel production and gradually improving economic growth.
The total reported stockpile represents 6.5 weeks at the current rate of consumption, which is a further decline since previous quarters and also near historical lows. We think this ratio will remain subdued and have an overall supportive effect on prices.
Statistics just released from the International Nickel Study Group (INSG) show upward revisions to recent global nickel consumption numbers and slight downward revisions to refined production numbers (as expected). The latest data for February shows that global nickel consumption grew 1.3%, year over year, while production grew 4.2% over the same period; however, nickel consumption was lower by almost 5% compared with the previous month. As a result, the global refined nickel market was largely balanced in February, at plus-900 tonnes, compared with plus-4,000 tonnes in January and a small deficit of 1,800 tonnes in February 2002. This is a market with strong fundamentals, especially in light of renewed inventory drawdowns in the aftermath of the Norilsk Nickel delivery.
Zinc
We have lowered our demand growth prospects somewhat for this market for 2003-04, as a result of its strong positive correlation with economic growth. An even softer economic outlook (we now assume Western World industrial production growth of 2.1%, compared with our previous forecast of 2.3% for this year) could prevent this market from moving into deficit in the near future.
On the other hand, we believe the supply side is vulnerable to adverse developments with currencies, LME prices and treatment charges. For example, non-U.S. operations would be at particular risk from a further appreciation of local currencies, with a large share of the global industry operating at a loss in such a scenario, while annual treatment charges are currently being set around historical lows.
Many plants, not the least in China, are operating well below full capacity at present, owing to lack of raw material. Combined with strong demand growth in that region, this is likely to have restrictive implications on deliveries to the West. In fact, data for the first few months of this year showed monthly net exports well below the monthly average of last year, at 34,000 tonnes. However, increased availability of concentrates (which we do not expect, because new mine capacity is scarce over the next few years) could rapidly erode these positive effects.
There have been further positive supply-side developments, and a continuation of this trend is the biggest hope for the zinc market. Finally, the low price environment is beginning to affect production costs. Company announcements so far this year will involve capacity curtailments of almost 400,000 tonnes per year, some permanent. This number also includes the impact from a slight delay in the ramp-up of the Skorpion plant in Zambia. However, apart from Avonmouth and Noyelles-Godault, not all this capacity will be closed on a permanent basis. Most notable is the Biyan plant in China, which, apart from adverse economics, closed 100,000 tonnes of zinc capacity per year to provide sufficient power for its aluminum prod
uction. Falconbridge has decided to shut its Kidd Creek plant in Timmins, Ont., for an extended period over the summer, while Pasminco decided to bring forward the closure of the 92,000-tonne-per-year Cockle Creek smelter in Tennessee. There is a chance Falconbridge will prolong its temporary shutdown if market conditions remain poor, while continued power price rises in the northwestern U.S. could encourage Teck Cominco to reduce metal output at its Trail smelter in British Columbia and sell power forward instead.
Reductions in supply have so far had a restricted impact on the LME zinc price. Instead, there has been some upward pressure on physical spot premiums, in Europe in particular. Nonetheless, we have made some adjustments to our zinc price forecasts over the longer term, as we think permanent capacity closures could have a long-term positive impact, enabling prices to move toward US$1,000 per tonne even though they have been trading in a well-defined band of US$750-900 per tonne over the past three years.
The sharp rise in European galvanized steel prices eased to US$425 per tonne in February, compared with the recent peak of US$455 per tonne by year-end. However, the recent slide has not been convincing, with prices a little stronger recently. Continuously strong galvanized steel prices are positive for the zinc price outlook, though we do foresee a near-term bounce in zinc prices.
Zinc spot treatment charges have continued to fall and are around the same low levels that were registered in mid-1994, US$140 per tonne, reflecting a still-tight market for raw material. There has reportedly been little spot business conducted in Europe recently; spot market activity remains centred in Asia — particularly China. However, Chinese business has also softened somewhat, owing to the 100,000-tonne-per-year production curtailment at the Baiyin smelter, which has helped release some raw material feed to other local producers.
Recent trends in LME inventory movements have continued, with European stockpiles still falling (apart from an unusual net inflow reported at the beginning of April) and Asian and U.S. stockpiles continuing their upward trends. We believe the European drawdowns are related to production curtailments in the region, while changes in the other regions reflect a soft demand environment. The net result of these diverging trends in LME inventories was a rise of 18,000 tonnes during the first quarter. In contrast to most other base metals, LME zinc inventories remain in a long-term upward trend, which is discouraging for the outlook.
Total reported inventories of zinc stood at about 1.2 million tonnes at the end of January, which is 130,000 tonnes higher than in March 2002.
Although there were signs of zinc consumption picking up at the beginning of the first quarter, a rise in total inventories has prevented the stock-to-consumption ratio from falling. Instead, the ratio rose further to an estimated 8.2 weeks in the first quarter, which represents the highest level since the third quarter of 1996. This compares with eight weeks in the previous quarter. We believe the inventory overhang, together with depressed demand conditions, will dampen the potential for any significant price rise this year.
— The opinions presented are the authors’ and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com. Kevin Norrish is head of Commodities Research/Energy for Barclays and Ingrid Sternby is a base metals analyst with the company. E-mail: kevin.norrish@barcap.com and ingrid.sternby@barcap.com
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