Chinese stainless steel production could increase by as much as 15% or more this year, Natixis Commodity Markets said in its third-quarter metals review Thursday.
Such a rise would potentially create a similar increase in demand for nickel and would offset an emerging surplus, it added.
NCM believes that rising production of stainless steel in China helps to explain declining LME nickel stockpiles earlier in the year and that rising demand for nickel could see a tighter market than previously forecast.
“As such, we have adjusted our forecast for this year’s market balance, projecting a 16,000 tonne deficit, ie a significantly smaller surplus during the second half of the year than we had initially been expecting. For 2012, the corresponding surplus is similarly diminished,” NCM said.
NCM also believes that the production of higher-quality nickel pig iron is likely to become a competitor to primary nickel production. Chinese producers have started to source higher-quality nickel ores to produce better quality NPI that can be used in a wider application of stainless steels, the report noted.
“This is nothing short of a revolution in the global nickel industry. From importing cheap nickel ores as an input to relatively low-quality stainless steel, Chinese producers are moving towards using more advanced furnaces to process higher-quality ores and produce high-grade stainless steel,” NCM said.
As a result of the better demand forecast, NCM has raised its base price forecast for nickel over 2011 and 2012. However, the report did suggest that if manufacturing in China weakens significantly, this would likely see a larger surplus develop and prices soften. “For 2011, we see an average nickel price of $25,300/mt, followed by an increase to an average price of $26,500/mt in 2012,” NCM stated.
Three-months nickel closed London Metal Exchange floor trade at $24,550/mt Thursday.