Merrill Lynch forecasts excellent nickel results

Merrill Lynch forecasts excellent nickel results

Merrill Lynch analysts declared Wednesday that nickel still ”has the best fundamentals of the industrial metals” and that ”nickel companies should deliver excellent results during the reporting season.”

Research Analysts Daniel Hynes and Vicky Binns wrote that ”we remain bullish on the longer term prospects for nickel,” despite their predictions that the ”nickel price will be under pressure once the stainless steel industry begins de-stocking” during the first quarter of this year.

In their analysis, the analysts explained that about two-thirds of all nickel is consumed in the production of stainless steel, ”and there is strong evidence that stainless steel stocks are rising to alarm levels that could precipitate a stainless steel producer de-stock (similar to H2 2005).

”There is not doubt that some of the slowdown in demand has been the result of record high prices in the nickel market,” they said. ”With nickel prices hitting all time highs, it is likely that stainless steel producers and end consumers will look to reduce inventory and keep their cupboards as bare as possible, just in case the nickel market suffers a correction.” Based on stainless steel de-stocking/re-stocking cycles, ML forecast stainless steel destocking during the current quarter, ”and do believe this will have a negative impact on spot nickel prices (no matter what investor/hedge funds own) and on nickel-leverage equities.”

The analysts also predicted a surge in stainless steel production when China’s Baosteel gets its new capacity to full production and a giant mill at Taiyuan is commissioned. Meanwhile, ML suggested that China is using pig iron as an alternate supply of nickel.

”Despite our forecast that nickel prices can come under severe pressure from current record spot price levels due to stainless de-stocking, we would look at the pull-back, after the dust settles, as a buying opportunity as we do believe the nickel market has a lot more life left in it,” they said.

The analysts also asserted that supply issues will continue to dominate the world nickel market this year with frequent supply disruptions, as well as a loss of nearly 4% of potential nickel production.

Meanwhile, a British shipwreck has also put pressure on nickel prices as more than 1,000 tonnes of nickel is on board the MSC Napoli, which was deliberately run aground on Britain’s south coast near Branscombe, England, last week to prevent the ship from sinking.

To compound potential supply disruption concerns, Swiss mega-miner Xstrata is still negotiating with unions at Falconbridge nickel operations in Sudbury, Ontario, which produces about 4% of yearly international nickel production. Schedules to bring new nickel mines into production have been delayed at BHP Billiton’s Ravensthorpe in Australia and CVRD Inco’s Goro project in New Caledonia.


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