Nickel and Zinc

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Two industrial metals that made all time highs in 2007, yet declined nearly 60% since. Nickel is currently trading at $19,135.00 per tonne and zinc at $1,645.50.

Nickel briefly ran up to $54,000 a tonne in May 2007. Because of the high prices in Nickel and Iron ore, stainless steel producers started to supplement refined nickel with nickel pig iron, a type of iron containing low grade nickel. Because of the recent slide in nickel prices however, most pig iron producers are now operating at a loss. The most efficient producers require nickel prices of over $24,000 a tonne to generate profit. I expect their margins to further decline as prices of iron ore decrease, increasing the demand for refined nickel.

From a geopolitical viewpoint, nickel is a war metal. You simply cannot wage a modern war without large amounts of nickel as it's used in everything from armored plates to jet engines. Russia is currently the largest miner of nickel and given recent events surrounding South-Ossetia I expect them to curtail nickel exports in order to increase strategic stockpiles for their own military.

Zinc is used to galvanize steel and in alloys that protect steel products from corrosion. Zinc can't be supplemented by another metal and demand has been steadily increasing. Despite this, zinc saw its price decline from a high of $4,600 in November 2006. This can largely attributed to an increase in supply as miners pushed forward the scheduled close of operational mines and restarted old mines and development projects.

Because of current low prices most of those mines are opperating at a steep loss. Inflation in the mining sector is over 10% a year, while zinc prices continued to fall. A number of those mines are announced to shut down sooner than expected or will shut down in the near future. Lennard Shelf in Australia is a prime example of just such a mine. Its shutdown alone will shave 350,000 tonnes per annum off world wide production, which is greater than the current zinc oversupply of 220,000 tonnes.

As supplies tighten, I think the market will look forward towards 2010 and 2011 and start to price in the exhaustion of a number of large zinc mines. The largest zinc mine in the world for example, Xstrata's Brunswick mine, is scheduled to close in 2010.

I see demand continue to increase in the future. Steel is currently in high demand and Governments are alocating more money to spend on infrastructure. Zinc cannot be missed in bridge building, highway construction or power masts used to destribute electricity.
 
Nickel Rises in London as Xstrata Suspends Falcondo Operations

By Chanyaporn Chanjaroen

Aug. 19 (Bloomberg) -- Nickel rose for the first time in four sessions in London after Xstrata Plc, the world's fourth- largest producer of the metal, suspended production at its Falcondo operations in the Dominican Republic. Lead also gained.

The Falcondo halt may last four months, Zug, Switzerland- based Xstrata said today in a statement, citing rising production costs and lower metal prices. Falcondo has an annual capacity of 29,000 metric tons of nickel contained in ferronickel, or about 2 percent of world output estimated at 1.45 million tons last year by UBS AG.

``We'll see more ferronickel production closing down in the next few months,'' Charles Cooper, an analyst at Evolution Securities Ltd. in London, said today by phone. ``That will be good for prices.''

Nickel for delivery in three months jumped $749, or 4.2 percent, to $18,799 a ton as of 11:43 a.m. local time. The contract has lost 29 percent this year, following a 21 percent slump in 2007.

Metal producers have delayed new projects and cut output after nickel prices slid to near their production cost, curbing profits. Industrial Metallurgical Holding, Russia's third-largest producer, slashed output by 30 percent to 40 percent after a slump in prices made its operations unprofitable.

Minara Resources Ltd., Australia's second-largest producer of the stainless steel ingredient, also deferred an expansion plan. BHP Billiton Ltd. suspended production at its Kalgoorlie plant in Western Australia for four months from June.

No Surplus

Some 55,000 to 60,000 tons of nickel output was lost this year because of labor disputes and disruptions from Australia to South America, said Vanessa Davidson, who heads London-based CRU's nickel and stainless steel research. Last year's surplus was 96,000 tons, she said.

``I don't see a surplus in 2008 at this point,'' Davidson said today by phone from London, expecting a balanced market for this year. ``Demand has been disappointing but the output loss has provided support.''

Lead added $64, or 3.8 percent, to $1,759 a ton after LME- tracked stockpiles earmarked for withdrawal jumped 11 percent to 14,150 tons, the highest since July 2006. That accounts for 16 percent of total exchange inventories. Most of the increase was in Singapore, traditionally a location for deliveries into China.

Lead has dropped 31 percent this year, the most among all LME metals.

Nyrstar NV, the world's largest zinc producer, reported first-half profit was 21 million euros ($30.8 million), less than the 57.9 million euro median estimate of six analysts in a Bloomberg News survey. The company closed an unprofitable Chinese plant, citing high raw-material costs, and will move a smelter in Port Pirie, Australia to Hobart in Tasmania.

Profitability Concerns

``We are clearly concerned about profitability at some of our operations,'' Chief Executive Officer Paul Fowler said on a conference call with analysts today. ``Port Pirie, for example, is the most expensive zinc smelter in the world.''

Zinc jumped $60, or 3.6 percent, to $1,720 a ton.

Tin stockpiles monitored by the LME fell 250 tons, or 4.1 percent, to 5,910 tons, the exchange said today, taking this year's loss to 51 percent. The benchmark contract increased $695, or 3.6 percent, to $20,000 a ton.

Tin for immediate delivery traded at a premium of $175 per ton over the benchmark price yesterday, the highest since July 16, indicating less availability of metal stockpiles.

Among other metals traded on the LME, aluminum rose $5 to $2,760 a ton and copper increased $48.75 to $7,400 a ton.

To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net
 
The supply side of the nickel and zinc stories seem to be driven by the same fundamentals. Producers are cutting out put by closing down smelters, shutting down production at mines and delaying new projects.

Steel prices have come down somewhat and a number of stainless steel manufacturers have started to cut prices:

POSCO and Jindal cut prices as nickel drops - Report

August 19, 2008

Bloomberg reported that POSCO and rival Jindal Stainless Limited have cut prices of the rust resistant metal aftethe cost of nickel declined. POSCO cut prices by as much as 10% from August 18th 2008, the first reduction this year while, Jindal dropped prices by more than 5%.

POSCO is also cutting production by 25,000 tonnes or by 20% of a monthly average, following a similar reduction in July 2008. The price of its 300 series hot rolled products will fall KRW 400,000 a tonne to KRW 3.65 million and cold rolled product prices will drop by KRW 400,000 a tonne to KRW 3.92 million.

Jindal also cut the price of its 300 series by as much as USD 200 a ton to USD 3,600 a tonne, the third reduction this year.

It may be noted that nickel has slumped by 32% this year as rising supplies outpace demand from steelmakers.

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I am long both nickel and zinc futures on the LME. I also own stock in Lundin Mining Corp. I expect nickel to hit $25,000 a ton this year and zinc $2,500
 
For those that don't receive LME data, Kitco base metals is a good data source.

www.kitcometals.com

The real time prices they display are spot prices.

Spot zinc increased by 7.2% today and spot nickel by 6.7%.

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I am long both nickel and zinc futures on the LME. I also own stock in Lundin Mining Corp. I expect nickel to hit $25,000 a ton this year and zinc $2,500
 
China's Stainless Steel Demand Stays Weak, Makers Say (Update2)

By Helen Yuan

Aug. 21 (Bloomberg) -- Stainless steel demand in China, the world's largest producer, will stay weak next month amid concerns of an economic slowdown, the country's three largest producers said.

``The market hasn't improved,'' Chai Zhiyong, vice president of Shanxi Taigang Stainless Steel Co., the largest maker, said over the phone. ``It's still weak,'' he said. Building demand normally picks up in September when the weather cools.

China's economy expanded at the slowest pace since 2005 in the second quarter as the government tightened credit, and home prices rose at the lowest rate in 14 months in July. Korea's Posco and India's Jindal Stainless Ltd. this month cut prices.

``There is a lack of incentives to boost demand,'' said Jasmine Qi, a Beijing-based stainless-steel analyst at CRU International Ltd. ``China's tightening measures are likely to stay in place after the Olympics'' this month, she said.

Baoshan Iron & Steel Co. and other Chinese stainless steelmakers may raise production by as much as 15 percent in September from August, Macquarie Bank Ltd. said in an Aug. 20 note, without saying where it got the information.

Shanghai-based Baoshan, China's second-largest maker of the alloy, probably won't raise its output as ``demand for stainless steel hasn't recovered,'' Wang Chengxue, assistant to the president of the stainless steel unit, said in an interview.

Taigang won't lift output next month, Chai said late yesterday.

Stalled Nickel Purchases

Baoshan Steel fell 5 percent, the biggest decline since July 16, to close at 6.95 yuan in Shanghai trading. Taigang dropped 4 percent to close at 7.80 yuan in Shenzhen.

A stalled recovery for stainless steel may deter producers from buying more nickel, used to make the alloy. Nickel prices have dropped 24 percent this year as steelmakers cut purchases.

China is the largest consumer of nickel.

Posco, Asia's largest maker of stainless steel, is cutting production by 25,000 metric tons, or 20 percent of a monthly average, it said Aug. 12. It cut prices by as much as 10 percent.

``Demand for the 300-series products hasn't had any signs of recovery,'' said Charles Lin, a marketing manager of Lianzhong Stainless Steel Corp. Lianzhong, Yieh United Steel Corp.'s Guangzhou plant, is the nation's third-biggest stainless steel mill. The 300-series is a benchmark product that has a nickel content of 8 percent.

Breakeven

Jinchuan Group Co., Asia's largest nickel producer, cut the metal's price by 4 percent to 149,000 yuan ($21,753) a ton on Aug. 7, reflecting the decline in global rates. The selling price is very close to its breakeven level, CRU's Qi said.

Chinese mills expanded crude stainless steel capacity faster than demand growth in the past two years. Capacity has exceeded 8 million tons, compared with demand of 7.4 million tons, Taigang Chairman Li Xiaobo said July 24.

Taigang, based in Taiyuan, Shanxi province, slashed output of crude stainless steel by 50 percent in May, and has kept production unchanged at 170,000 tons a month in June and July.

China's stainless steel output gained 5.5 percent to 3.8 million tons in the first six months, according to the Stainless Steel Council of China Special Steel Enterprises Association. China's imports of nickel and alloys gained 21 percent to 65,599 tons in the period.

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Although demand for stainless steel is faltering, output is up by 5.5% during the first six months of this year and Chinese imports of nickel and nickel alloys are up by 21%. I expect China's nickel import to grow robust despite plans to cut stainless steel production. The reason is that manufacturers will switch to refined nickel from pig iron nickel as usage of the latter has become unprofitable.

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I am long both nickel and zinc futures on the LME. I also own stock in Lundin Mining Corp. I expect nickel to hit $25,000 a ton this year and zinc $2,500
 
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