Nickel price surge may begin to lose steam in Q3, benefitting stainless steel buyers

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By: Sakthi Prasad --

19 June, 2014

Nickel price surge may begin to lose steam in Q3, benefitting stainless steel buyers
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In collaboration with Lead Analyst Badri Narayanan

Indonesia banned export of mineral ores including that of nickel early in January. This led to a surge in demand for nickel with the price touching $8.58 per pound in third week of June, a 35 percent increase compared to the January price of about $6.30 per pound.

Indonesia, the world's largest miner of nickel, banned the mineral ore export to force mining firms to ship out only processed minerals in the hopes of attracting investment in smelters and refineries. In other words, the country wants to move up the value chain instead of just exporting raw ore.

Nickel is a key raw material for producing stainless steel and the price surge since the beginning of this year has thus far directly impacted the stainless steel price.

The stainless steel price in the U.S. is up by 19% since the start of the year, whereas in Europe it is up by 17% as of June 2014.

stainless steel price in the U.S.

STAINLESS STEEL CONSUMPTION PATTERN

STAINLESS STEEL CONSUMPTION PATTERN

The upsurge in stainless steel price has caused concerns among players operating in construction, industrial equipment and appliances manufacturing sectors, as they are the principle buyers of stainless steel. These three sectors together account for 75% of the stainless steel demand.

However, all is not lost yet. In all likelihood, such price spikes will not stretch unto future forever. The reason being the current rally in nickel price is widely seen as a one-time isolated trend.

A similar Indonesia-type ban will not materialize as it is highly unlikely that other countries with significant commercial nickel reserves such as Australia, Canada, Brazil, Russia and New Caledonia (French dependency) will impose similar ore export bans.

Since this is a one-off event, it is reasonable to conclude that consumers of stainless steel need not expect a similar nickel price rally in the near future.

The price volatility is expected to shrink as nine new nickel smelters are being built in Indonesia, which are expected to be operational by late 2014.

STAINLESS STEEL CONSUMPTION PATTERN1

More smelters are expected to come online in the coming 2- 3 years, which will concurrently increase the Indonesian output of refined nickel.

The promise of production from new units along with existing warehouse stocks is expected to stabilize nickel prices by late Q3 2014.

And as a consequence, the stainless steel market is expected to react accordingly to accommodate this price adjustment.

Anticipating higher prices, consumers have been restocking ever since the rally commenced in early Q1 2014. This has resulted in a steady rise in stainless steel stock among consumers.

The improvement in demand from manufacturing and construction sectors has also helped the consumers accommodate the increased stocks. This restocking exercise has resulted in comfortable stock level among consumers, providing them with the needed leverage to sit out of the market to manage changes in the price trend.

With the nickel price rally expected to lose steam in the coming quarter, stainless steel consumers will look to destock and consume their built up inventory, in anticipation of lower stainless steel prices in Q4 2014.

However, in light of recovering economies of U.S. and Europe, the destocking period will be shorter at about 2 months as opposed to the usual average of 2.5 to 3 months.