Nickel glut extends to fourth year on China supply

The global glut of nickel will extend into a fourth year in 2014 as new technology lowers costs for Chinese furnaces producing record amounts of a lower-grade substitute that helped drive prices into a bear market.

Chinese producers will supply 456,000 metric tons of nickel pig iron in 2014, or 49% more than last year, Morgan Stanley estimates. Costs at their rotary kiln electric furnaces more than halved to $11,000 a ton in five years, according to Beijing Antaike Information Development Co. That implies they’re still profitable even after prices slumped 16% since the start of 2013, reaching a four-year low of $13,205 in July.

China expanded NPI output from 3,000 tons in 2005 to make the stainless steel needed for its construction boom after costs for pure nickel reached a record $51,800 in 2007. While slumping prices previously shut furnaces in China and curbed excess supply, the new technology means they can now compete with traditional refineries. The cumulative surplus since 2007 will have reached about 589,000 tons by the end of 2014, or almost four years of U.S. demand, Morgan Stanley says.

“Most traditional nickel producers cannot compete on price and are having to close or scale back operations,” said Gavin Wendt, the founder and senior resource analyst at Sydney-based Mine Life Pty., who has followed the mining industry for more than two decades. “The biggest factor damping prices at present is the increasing level of China’s production of NPI.”

Trader Estimates

Nickel tumbled into a bear market in May and traded at $14,372 on the London Metal Exchange today. Its slump is the worst among the six main industrial metals traded on the bourse this year and prices will drop as much as another 17% to $12,000 by the end of the quarter, according to the median of 12 analyst and trader estimates compiled by Bloomberg.

The metal’s retreat compares with a 1.6% decline in the Standard & Poor’s GSCI index of 24 commodities since the start of January. The Bloomberg U.S. Treasury Bond Index lost 2.1% and the MSCI All-Country World Index of equities advanced 17%.

Global nickel supply will exceed demand by 100,000 tons in 2013, with a surplus of 40,000 tons in 2014, according to Jim Lennon, a senior consultant to Macquarie Group Ltd. Barclays Plc projects an excess of 86,000 tons next year and Societe Generale SA 32,000 tons. Morgan Stanley predicts 49,400 tons and called NPI “the largest threat to the global primary nickel market” in an Oct. 7 report.

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