Commodities Watch: Nickel Stockpile A Growing Concern (VALE, BHP, XSRAY, TC, GMO, JJN)

An organization called the International Nickel Study Group is projecting a 60,000 metric ton surplus of nickel by the end of 2011, compared with a shortage of 30,000 metric tons at the end of 2010. Now priced at about $22,000/metric ton, the price of nickel could fall by 10% at the end of the year. This latest report is a dramatic turnaround from just a few months ago when RBS was forecasting a robust growth rate for nickel of 5% annually over the next four years.

If this oversupply materializes, Russia’s Norilsk, the world’s largest miner of nickel, could take a nasty hit. Other large nickel producers include Brazil’s Vale SA (NYSE: VALE), BHP Billiton plc (NYSE: BHP), and Xstrata plc (OTC: XSRAY).

Nickel is a primary component of stainless steel, so an oversupply of the metal could well mean that demand is lower for stainless steel. But, according to a stainless steel industry group, production in the first quarter of 2011 totaled 8.4 million metric tons, an increase of 8.2% compared with the same period a year ago.

While the group does not believe this growth rate is sustainable for the remainder of the year, it does expect an  increase in stainless steel production. The apparent contradiction appears to be a replacement of demand for refined nickel with pig iron nickel.

Chinese production of pig iron nickel is expected to rise 50% this year, and gets a share of the blame for the growing stockpile. Another weight on the price is the development of new mines, which are expected to add 11% to supply in 2012.

The market for stainless steel is also contracting, as manufacturers are finding substitutes for nickel. Higher proportions of chromium or molybdenum can often replace the 10% nickel content of the most widely used stainless steel.

Miners like Norilsk and the others will look to copper, iron ore, or coal to make up the coming softness in nickel prices. Of course there’s only so far to take that, too, as copper prices have fallen and iron ore and coal prices are stabilizing. Chromium prices too have risen, and molybdenum is relatively flat though it wiggles around a lot.

The metal to watch most closely here is probably molybdenum, which could see demand rise as its use is becomes more common in things like solar PV panels based on the copper indium gallium diselenide (CIGS) technology. Two US miners heavily involved in molybdenum mining are Thompson Creek Metals Co. Inc. (NYSE: TC) and General Moly, Inc. (AMEX: GMO). Both currently trade nearer their lows than their highs, but if nickel use declines in the making of stainless steel, molybdenum could be a solid replacement.

iPath DJ-UBS Nickel TR Sub-Index ETN (NYSE: JJN) is generally too thin for us to cover.  It is still specific to the metal and its 3% drop so far today is really about a 5% drop if you just consider the last three days.

Paul Ausick