By Stuart Burns
Stainless buyers are rightly holding off doing anything more than buying hand-to-mouth this quarter. As the nickel price has fallen from over $29,000/ton in February to below $22,000/ton this week, stainless surcharges have fallen with the normal time lag in lockstep. As a result the supply chain has, as it always does, slowed buying to avoid being left with higher priced stock.
As buying has slowed, mills’ capacity utilization has fallen according to a Reuters article to 70 percent today, with the expectation it will be at 65 percent by the end of this quarter. Nor is it likely to get better — the World Bureau of Metal Statistics this week announced that in its opinion, the nickel market was in surplus during the January to April 2011 period with supply exceeding apparent demand by 1600 tons.
By comparison, in the whole of 2010 the calculated surplus was 2000 tons, but this figure includes substantial imports recorded by China, some of which were destined for re-stocking purposes. Therefore, in reality, the real surplus was probably higher. Reported stocks held in the LME at the end of April were 19,000 tons lower than at the end of last year, the WBMS reports, suggesting underlying nickel demand may not be as bad as some think.
Nevertheless, rising new mine supply and faltering stainless demand have weighed on sentiment for nickel in the first half. Reuters reports some nickel watchers are expecting a recovery in nickel price from Q3 onwards, but with Chinese demand slowing and Western demand growth subdued, we do not see the draw-down of LME inventory as anything more than a short-term phenomenon, possibly supported by delays in new mine capacity coming on stream. Through the middle of this decade, mine capacity is set to increase significantly; HSBC in its last quarterly report predicted nickel prices falling to $18,000 per ton by 2013.
Stainless output is above pre-crisis levels and set to rise by 7-10 percent, according to Markus Moll, managing director of SMR Steel and Metals Market Research, as quoted in a Forexyard.com interview. The major dynamic in terms of supply and demand is that China has since become a net exporter of stainless, so capacity -- ramped up to serve the thriving Asian market -- is trying to find a home for product in slow western markets.
The mills know they have to rationalize production capacity, and for those where stainless is a sidebar to mild steel production, there have been attempts to sell off lower-return stainless divisions. Unfortunately for producers with a fairly fragmented industry and high capital costs, an early rationalization is unlikely; the good news for buyers is the combination of over-capacity and falling nickel prices will continue to depress prices.
In turn, weak stainless demand will take any steam out of chrome and molybdenum prices, leading to weaker stainless prices across the range of nickel and non-nickel bearings grades. The stainless website stainlesssteel.me wrote recently on the topic, saying several European stainless steel producers are planning cuts up to 50 percent to try and prevent further price falls. This includes ThyssenKrupp (OTCPK:TYEKF), Aperam (OTC:APEMY), Outokumpu (OTC:OUTKF) and Acerinox (OTC:ANIOF).
While in the long-term this would reduce the oversupply, the dilemma they are facing in the short term is that in reducing output, they also decrease the demand for nickel, chrome, etc. and could stimulate further falls in surcharges. The website quotes Baosteel in China, which is optimistically predicting Chinese demand will increase at 5-7 percent for the next five to 10 years ... but with China largely self-sufficient in stainless and with massive domestic production of nickel pig iron, Chinese demand is not going to have the same impact on the global stainless market as it once did. The best the Western producers can hope is strong Chinese demand may reduce Chinese exports of finished stainless semis.
For Western stainless buyers, inventory levels must be lower than they were earlier this year and some expect a bounceback as re-stocking takes place in Q3, but with the traditionally strong Q2 not creating the hoped-for demand, it will take a sustained upturn in nickel prices or an unexpected surge in industrial demand to bring buyers back to the market en masse.