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.

The Sudbury Star reported that nickel prices may be moving down world markets, but they will stay high enough for Vale and Xstrata to keep producing in Sudbury.

Mr Kerry Smith analyst at Haywood Securities said that “I’m thinking US USD 9 to USD 11 a pound for the medium term or the next one to three years. Right now, it’s between USD 10.50 and USD 10.60 a pound. I’m thinking it’s going to be in this range. In the next few months, I think it’s going to be USD 10 to USD 11. I can’t see it going higher or lower. I think Vale and Xstrata Nickel can make decent money at these prices.”

Mr Smith said while a lot of new nickel production is coming on stream involving laterite nickel ores to be processed with new acid leaching technology, it won’t all be coming into play at once. He doesn’t see the laterite nickel ores (meaning ore located close to the surface) having much impact on world nickel supply and demand.

He said that “I don’t know if they will work as good as expected. There’s a lot of new production coming into the market from Vale and Xstrata. They have big balance sheets. They can get their projects to work. I think nickel is going to do well, but I don’t think we’re going to get back to the price we had in 2003: USD 25 a pound.”

One aspect of the world nickel market, China’s expansion and refinement using nickel pig iron for internal consumption has Mr Smith concerned about what could happen to the world nickel market as a whole.

While Chinese producers of nickel pig iron, a nickel substitute, had a production cost of about $15 a pound when they started several years ago, efficiencies introduced since then may have cut costs by about half.

Dr Jean Charles Cachon, a commerce and administration professor at Laurentian University agreed that world nickel prices won’t move much in the year ahead.

He said that after nickel hit USD 25 a pound in July 2007, one of the world’s big nickel consumers China took such measures as stockpiling nickel and getting into nickel pig iron to ensure its growing economy would never get burned again by rampant speculation.

Mr Cachon said look for a nickel price in the USD 9 to USD 11 range for some time.

In Greater Sudbury, Vale’s No 2 flash furnace at its Copper Cliff Smelter is down due to a 16 week rebuild that is now underway. The expected loss of nickel production will be about 5% of Vale’s 2011 nickel output or about 15,000 tonnes.

Ms Angie Robson, a spokeswoman with Vale in Greater Sudbury, said that Vale doesn’t talk about nickel prices and where they are heading. She added that “We are making tremendous investments over the next few years to make our operations more efficient. We will be spending USD 3.4 billion between now and 2014.”