Why nickel prices are high, its outlook, and how it affects miners

Implications: The article notes ever increasing highs for nickel and similar record trends for other base metals.

One of the supports for high metals prices is tight inventories.

Inventory lows are due to demand highs and a long period of under exploration up until 2003.

In particular, new, large nickel projects are difficult to develop even if the are known to exist. There are several factors which will continue to support a longer term higher nickel price, even if we are currently in an investment 'spike'.

Analysis: The metals bull market has been driven and supported by tight inventories, and these fundamentals together with inward investment into the commodities market has helped support metals prices at all time highs.

When China entered the WTO early in the new millennium the change in metals demand was marked. Ni consumption has almost doubled since 2003, copper consumption has increased by 25% and continues to rise.

Mining companies, and specifically mine developments, however, work to a slower time scale, and cannot match such a pace to ramp up production. 

A global supply deficit has followed, which together with new demand, investor positions and paucity of off warrant stocks. With some metals such as gold or copper, the lead times are generally faster because the metallurgy and mining is easier.

With nickel, however, the largest projects are known to be more difficult to bring on-stream, mainly due to nickel laterite metallurgy. In this less fragmented industry it is therefore easier to see problems even with mining projects in advanced stages of development, lending further support to the price. Ni laterite projects also typically require unusually large capital expenditures.

A series of supply disruptions and negative announcements during 2006 have also supported the price, and there seems to have been little drop off in demand for stainless steel despite record high prices. Whilst substitution is a notoriously difficult market to analyze, high prices across the board are minimizing this for Ni and lower grade stainless steel which uses less nickel is already being fabricated.

Thus whilst we may be experiencing an investment spike in nickel, its fundamentals certainly give it a good longer term outlook. Perhaps this will be reflected in revaluation of nickel miners' reserves as the market settles on a longer term view of the nickel price, something that isn't done lightly when the economic model for a mine sometimes has to cover several decades.