Nickel Prices to Take Years to Recover From Slump, Analysts Say

By Jason Scott

Oct. 22 (Bloomberg) -- Nickel, used to make stainless steel, will take years to recover from a price slump that's wiped out almost 80 percent of the metal's value in the past 18 months, industry analysts say.

A realistic price over the next few years is probably about $15,000 to $17,000 a metric ton, Carey Smith, an analyst at corporate advisory and stock broker Alto Capital, said today. Nickel fell $176, or 1.6 percent, to $10,524 a ton on the London Metal Exchange at 4:29 p.m. in Perth.

``The high nickel prices of the past two or three years are gone,'' Smith said at a conference today in Perth, Western Australia. ``The selling is not due to fundamentals, it's hedge funds and other hot money rushing to get out of the market.''

Nickel has more than halved this year as the credit crunch widened, threatening a global recession and cutting demand for metals. The falling price means some of Western Australia's 250 companies exploring for the metal in a state four times the size of France will go bust, according to the Nickel Institute.

``The lower nickel price is certainly putting the industry under stress and will lead to closures, especially for some of the higher-cost operations,'' said Stephen Barnett, president of the Belgium-based institute. ``Metals will recover when the economy recovers. When that is, is anyone's guess.''

Shutdowns

Nickel is Western Australia's third-biggest revenue earner, trailing iron ore and petroleum, with sales in the last fiscal year of A$5.3 billion ($3.6 billion). The state has 12 operating nickel producers, according to the government.

``The junior end of the market will struggle over the next couple of years, with little or no capital available to conduct exploration, let alone project development,'' Smith said. ``Numerous nickel mines are expected to shut down globally as profits turn to losses.''

OAO GMK Norilsk Nickel, the world's largest producer of the metal, on Oct. 17 halted operations at its Cawse mine and ore processing plant in Western Australia, blaming rising costs. The decision doesn't affect Norilsk's other Australian nickel operations at Black Swan, Lake Johnston and Waterloo, which continue to perform well, the Moscow-based company said.

Posco, Asia's biggest maker of stainless steel, said today it will slash planned output by about a third this quarter and rival South Korean steelmakers may also cut production to cope with a slowdown in demand. Global consumption of nickel dropped for a fifth straight month in August to the lowest since September 2007.

Tighter Credit

``The global financial conditions are seeing credit tighten, stock markets collapse and many advanced economies likely to go into recession, if they are not experiencing it already,'' state Minister for Mines and Petroleum Norman Moore told the conference.

China's biggest steelmakers including Maanshan Iron & Steel Co. have pared output as the global credit crunch and economic slowdown curbs demand. Monthly production began to slide year- on-year from August, the first decline in more than a decade, as prices of the alloy tumbled 39 percent from a record on June 5.

``Supplies are falling dramatically as the Chinese producers close,'' Alto Capital's Smith said. ``The tough times could last longer than people expect. Supply is now falling dramatically as high-cost producers struggle to survive the current low nickel price environment.''

Upbeat Mood

Not all presenters at today's Australian Nickel Conference were gloomy over the future of the industry. Organizers said today's event was well attended, compared with other years and the mood ``surprisingly upbeat.'' The current turmoil in the market would weed out explorers unable to take the step into production, said Dale Rogers, managing director of Albidon Ltd.

``We'll look back at this time in months to come as the greatest opportunity to purchase,'' Rogers said. ``Inevitably what we will see is a focus on costs and a flight to quality and low-cost producers.''

Alto Capital's Smith agreed, saying Asia's fundamental growth prospects remain sound.

``The bumps in the market get rid of the pretenders and allows the genuine producers and explorers to expand,'' Smith said. ``Future demand will be driven by China, India and the rest of Asia. The nickel price in three years time will be higher than it is now, but I doubt it would reach the heights of last year.''

Western Areas NL, an Australian producer that's tripled sales, said prices may recover next year.

``The Chinese say `wait till the Chinese New Year' before we may a see a turnaround,'' Julian Hanna, managing director of the Perth-based company, told the conference. ``The price simply can't stay this low for long. It's putting pressure on all producers, including in China.''

To contact the reporter on this story: Jason Scott in Perth at jscott14@bloomberg.net