Prices for
Prices are supported by low inventories, strong demand (particularly from China), and subdued near-term output profiles at the world’s largest nickel producers. For these reasons, we see strong potential for further price gains in the near term.
Robust stainless steel production in China and rising import demand for refined nickel are the most compelling reasons for our bullish stance. After a period of de-stocking last year, Chinese refined nickel imports have risen sharply: in the recent first quarter, net imports were a significant 25,400 tonnes, compared with only 4,700 tonnes in the corresponding period of 2004.
China’s concentrates imports have also risen as the country’s largest nickel producer is expanding its operations to 100,000 tonnes per year in response to strong domestic demand. The company hopes to increase capacity further to 150,000 tonnes per year, but sufficient concentrate feed is questionable. Local sources suggest Chinese requirements for refined nickel are hugely underestimated and that Chinese refined nickel demand will reach 190,000 tonnes this year, compared with a “consensus” view of 165,000 tonnes. We have adopted a more conservative approach, though this still results in a global deficit.
In Europe, demand conditions are clearly softer, with reports of temporary local stainless steel production cuts. So far, however, slowing European demand has been absorbed by strong buying appetite from China. Despite macroeconomic concerns, the stainless steel markets in the U.S. and Japan continue to be strong. Demand from end-use sectors other than stainless steel has also strengthened, with a significant recovery registered in the super-alloy market, driven by aerospace and car manufacturing (turbo diesel engines being popular in Europe).
The scrap market remains tight overall, though it has been suggested that some Russian material is on its way to the market, while some might also be awaiting higher prices before making material available to the market. Tight scrap supplies and strong demand conditions mean pressure will remain for nickel producers to perform well. However, plants operating flat out mean the risk for output disruptions is large. Indeed, maintenance shutdowns will lead to lower production at the Western World’s largest producer,
Upcoming labour contract negotiations at Inco’s Manitoba plant in September are also likely to keep the market nervous, with labour contract talks starting in the first week of July.
More generally, future capacity growth plans are also at risk, related to higher production costs (for example, steel) and regulatory issues (environment, labour, and so on). Concerns also relate to the reliability of pressure-acid-leach technology, on which many future projects will be relying.
Prices have remained above that level since, and given trends of slowing demand conditions and sharply rising mine production, the strong performance has taken many by surprise. This means consumers are under-hedged while investors hold only a relatively modest long position. We expect a surge higher in copper prices in the second quarter, as inventories are extremely low and as consumers may well be forced to buy. This upward movement will depend, to some degree, on the market’s perception that the copper price has yet to peak.
Total reported copper stocks measured as weeks of consumption have now fallen below what can be regarded as “critical” toward four weeks. In the past, such low availability was accompanied by sharp price spikes. Global exchange stocks are only around 100,000 tonnes, with a mere 20,000 tonnes of copper on the Shanghai Futures Exchange.
Evident from a steep backwardation, the Chinese markets remain extremely tight of material, and the underlying consumption trend remains strong, driven by investment in the power sector. Double-digit growth rates are expected in power-generating capacity expansion for this year and next, which will help support China’s total copper demand growth of at least 10% this year.
The high price environment slowed Chinese buying activity in the first quarter, as manufacturers have been largely unable to pass on higher input costs to their customers. Copper semis production has slowed, and refined copper imports have stalled as a result. However, there have been recent signs of physical orders picking up and domestic prices firming, which suggest imports will resume growing.
Elsewhere, extremely accommodative monetary policy alongside robust manufacturing activity and still-high capital investment spending in the U.S. supports copper demand. Last year’s strong demand growth will clearly not be matched, but a traditional pickup in seasonal demand in the second quarter ahead of the Northern Hemisphere summer slowdown now lies ahead.
On the supply side, mine output has picked up sharply over the past year, accompanied by a surge in spot treatment and refining charges toward about US$200 per tonne and US20 per lb. in April. Constrained smelting capacity, partly due to an unusually high number of maintenance shutdowns, has added to metal tightness. However, concentrates stockpiles have now built up, and better operating smelting rates will help ease market conditions in the second half of 2005. Then again, the rise in mine output is probably temporary: in 2006, mine output will slow down, especially in Chile.
We believe refined stocks will have failed to build sufficiently by then to avoid renewed upside pressure in prices, and we expect prices to stay close to the US$3,000-per-tonne mark in 2006.
— 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. Queries may be submitted to the author at kevin.norrish@barcap.com or ingrid.sternby@barcap.com
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