LONDON Deteriorating demand from stainless steel mills and rising mine production are likely to push the nickel market into surplus in the second half of the year and put modest pressure on prices.
The uncertain outlook for global economic growth and demand because of the debt crisis in the euro zone and the United States mean gloomier prospects for nickel demand.
Stainless steel producers use about two-thirds of global nickel output, which is estimated at above 1.5 million tonnes this year.
First-quarter production of stainless steel rose to a record high of 8.390 million tonnes, according to the International Stainless Steel Forum, and expectations for the second quarter are, at best, flat.
Meanwhile, analysts reckon China's production of nickel pig iron, a lower grade of the metal valued for its anti-corrosive properties, could climb above 200,000 tonnes this year, with some estimates as high as 250,000 tonnes.
"The outlook for nickel prices has deteriorated in recent months, partly because of rising production in China and rising output from a number of new projects," said Duncan Hobbs, am analyst at Macquarie.
Examples of miners producing more nickel this year include Vale (VALE5.SA), which recently said its Sudbury facility in Canada will reach full capacity in the second half of 2011, and Aneka Tambang (ANTM.JK), Indonesia's state-owned nickel miner.
"Widely reported slowdowns in stainless steel melting globally during the second quarter of 2011, combined with the seasonally slower third quarter 2011 demand period ahead suggest nickel demand growth will likely remain lackluster," Goldman Sachs said in a note.
"At the same time, supply is rebounding as unexpected disruptions are resolved and new supply comes on line."
Benchmark nickel prices on the London Metal Exchange stand at around $21,400 a tonne, having last week fallen to $20,200 a tonne, its lowest since late August last year and a loss of about 20 percent since August 1 this year.
VEERING TOWARD SURPLUS
A Reuters survey in July of forecasts for the nickel market showed the consensus was for a balanced market this year, but sluggish demand and mounting supplies since then mean some are now veering toward a surplus, albeit small.
"After a deficit in 2010 we anticipate a more balanced market in 2011," said Michael Widmer, an analyst at BoA Merrill Lynch. "We are concerned about the second half of 2011 partially because of scheduled increases at mine projects."
The consensus for 2012 was for a surplus of 30,000 tonnes.
Previously the story for new nickel mine supply has been similar to that of copper: Projects have taken longer and cost more than had originally been expected.
Anglo-Swiss miner Xstrata's XTA.L remote Koniambo nickel mine in New Caledonia is one such example. The miner earlier this month said the project would cost $4.6 billion, up from an initial estimate of $3.85 billion.
Canada's Sherritt International (S.TO) in June said it expected a roughly six-month delay and a 16 percent increase in costs at its Ambatovy nickel-cobalt project in Madagascar.
Analysts cite higher production costs overall as one reason for predictions that prices will hold up. Another reason is Chinese nickel pig iron, which analysts estimate cost between $16,000 and $20,000 a tonne to produce.
"If prices fall below $20,000 a tonne, you would start to lose some Chinese production," Hobbs said, adding that the expectations of a slowdown would weigh on demand and prices.
"When stainless mills think prices of raw materials are likely to fall, they will try to defer purchases."
That perhaps is one explanation that stocks of nickel in London Metal Exchange approved warehouses have risen nearly 2 percent since July 21 to near 103,000 tonnes.
(Editing by Jane Baird)