Nickel price collapse could sour stainless sentiment: MEPS

Nickel price collapse could sour stainless sentiment: MEPS

New York (Platts)--2May2006

A hasty retreat in nickel prices from their recent peaks could turn the
bullish sentiment in the stainless steel sector negative and trigger a round
of destocking with people unloading inventory in a falling market, UK-based
consultancy MEPS said Tuesday.

But an iminent collapse in stainless steel prices was not viewed as
likely and stainless price trends would depend largely on nickel price
developments in the second half of the year, it said.

Nickel's surge in price was creating "fresh headaches" for participants
in the stainless steel market, as trading in the last week of April on the
London Metal Exchange saw nickel reach a peak of $20,000/mt, MEPS said.

While some observers attributed nickel's soaring price to a physical
shortage of metal, demand was increasing because of the rise in stainless
steel production and increased consumption of nickel-bases alloys by the
aerospace sector, it said. At the same time, nickel supply was being
restricted by unexpected shutdowns at several producers, while labor disputes
threatened further disruption later in the year, it added.

"But the talk of shortages goes against the experience of some stainless
steel mill purchasing officers, who say they are not experiencing any
difficulty in obtaining metal," the consultancy said. "They see the price
being driven not by the normal issues of supply and demand but by commodity
fund investors and speculators," it added.

Regardless of the cause, high nickel prices were a reality and other
stainless steel production costs were also rising, MEPS said. In ferrochrome,
the oversupply that had kept a lid on prices last year was easing and contract
prices were around 10% higher in the second-quarter compared with Q1 2006,
MEPS said. But the impact on stainless steel prices would be nowhere near that
of nickel. Rising energy costs had been another concern for stainless melters.
Alloy surcharges have increased at European stainless mills each month since
February. With the latest leap in nickel prices, "the immediate prospect is
for further sharp increments in alloy adjustments," MEPS said.

Stainless steel buyers were looking to buy in more material than they
need for immediate requirements. "This will accelerate restocking by both
distributors and end users," said MEPS. "That has already been under way since
the first-quarter of this year," it added.

"But nickel, having risen so sharply, could fall back just as fast," MEPS
said. "In this case, destocking could resume," it warned. "Buyers will not
want to be caught holding excess tonnages in a falling market. Mills may find
that, in the latter part of this year, they will have to keep their production
rates in check if they are to avoid oversupplying the market," it added.

In North America, short-term transaction prices would continue their
upward trend and the price increases already announced were likely to stick.
"Stock levels have fallen further and the lead times extend towards the end of
the summer, In addition, import levels remain under control as the market is
very strong elsewhere," MEPS said.

Consequently, the consultancy said there was still room for price
increases to be accepted in the following months. "The recent nickel price
boom will be reflected in the June [stainless] prices, and that is when we
expect a massive increase," MEPS said.

Stainless steel price trends in the second half of the year would depend
on nickel price developments. While it was widely expected that nickel would
retreat form its recent peak, "this should not be taken for granted," MEPS
noted. "If these consensus forecasts are confirmed, then a big drop in
stainless prices is imminent, parly because buyers will start delaying
purchasing decisions," MEPS warned. The other key cost factors were not
expected to fluctuate dramatically.

"Real demand is likely to remain strong in the main consuming sectors and
the possible danger of imports is likely to moderate if the dollar
depreciates, as espected, against the Euro and Asican currencies," MEPS said.

"The main risk we identify, therefore, is a sudden drop in the nickel
price that may shift market sentiment to negative territory," MEPS said.

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