Nickel: A Bellwether For Copper?

June 22, 2011

 Is this year’s worst-performing LME metal a canary in the coal mine for copper? And is there any hope in sight for nickel prices?


Tolstoy once wrote, “Happy families are all alike; every unhappy family is unhappy in its own way.” He might as well have been writing about industrial metals.

Not two weeks ago, we took a hard look at tin, a market struggling to resurface under the weight of the lackluster economic recovery. For any industrial metals follower, the story should sound familiar—most metals have lagged similarly.

But the base metals sector is far from a happy family right now, and the bearish conditions plaguing each of the metals are not all alike. Take nickel for example.

Nickel used to be the superstar of the base metals scene: Prices struck a three-year high back in February of $29,425/tonne, rising since 2005 on the back of emerging market demand.

But since then, spot nickel has tumbled about 27 percent, and the metal has become year-to-date the worst performer on the London Metals Exchange (LME). In fact, nickel briefly touched its lowest price since last November on Monday, before closing at a yawn-inducing $21,650/tonne.

So what happened for nickel to fall so far, so fast?

Mine Supply Overwhelms Demand

Like a true Russian hero, nickel has become a victim of its own success.

In dollar terms, the nickel market’s overall value is closer to silver than gold, but it’s a hard metal to substitute. Nickel demand is primarily driven by stainless steel manufacturers, as it’s a key ingredient in producing this corrosion-resistant alloy. More than 60 percent of all nickel mined annually goes straight to the production of stainless steel, used in everything from cars to kitchen appliances to skyscrapers.

Naturally, the emerging market boom has been kind to the metal. Since 2005 or so, increased demand from China, Brazil and other developing markets has driven nickel demand sky-high.

But miners have had trouble keeping up with the pace of this new demand. Indeed, construction delays, technology setbacks and higher manpower costs have kept worldwide nickel production stagnant for years; from 2008 to 2010, nickel saw essentially no net growth in mine supply.

But the days of supply playing catch-up to demand are over.

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