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Will Nickel Recover Its Former Luster?

Nickel prices have doubled off their March 2009 lows but remain at less than half peak levels.

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As we saw with many other metals, nickel prices were hammered earlier this year due to anemic demand. Although the metal has rallied recently thanks to an uptick in stainless steel demand (among other factors), nickel prices are still a far cry from their early 2007 peak. We believe changes within the nickel industry could prevent a repeat of the 2006/2007 bonanza. Namely, a shift toward lower-nickel-content stainless steel has important implications for long-term nickel demand, while the emergence of Chinese nickel pig iron (NPI) production has introduced a swing producer to act as a pressure release valve when demand and prices are high.

Nickel Basics
Roughly two thirds of total nickel consumption goes into the production of stainless steel. Given its anticorrosive properties and the fact that it's easy to clean, stainless steel is widely used in food and chemical processing equipment and food service. Other uses of nickel include alloys for the aerospace, power generation, and automotive industries. As with many other metals, China has become a major consumer of nickel, accounting for approximately one fourth of global demand. The five-year period to 2006 saw rapid growth in global nickel consumption (5% per year, on average, according to the International Nickel Study Group). After 2006, however, nickel demand fell significantly due to weakening economic activity and increasing substitution of lower-nickel-content stainless steel. On the supply side of the equation, nickel production is relatively concentrated, with the top four producers (Norilsk Nickel,  Vale (VALE),  BHP Billiton (BHP), and Xstrata) contributing approximately half of the world's total supply. Nickel prices have been quite volatile in recent years, with a surge in demand driving prices to heights of nearly $55,000 per metric ton in early 2007. This spring saw prices drop as low as $9,000 before recently recovering to about $21,000 in August (although prices have now pulled back somewhat from the August highs.)

Elizabeth Collins has a position in the following securities mentioned above: VALE. Find out about Morningstar’s editorial policies.

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