Will record high nickel prices kill the golden goose

Implications: Nickel demand has benefited from the sharp gains in stainless steel output. However nickel is now the single most important cost in the production os stainless steel.  As such stainless steel prices have increased and demand for stainless is beginning to be affected. Nickel demand is likely to be adversely affected by lower stainless output and substitution.  As a result nickel prices could come under downward pressure.  

Analysis: High nickel prices (and the price of their alloys such as chrome) are automatically passed onto buyers of stainless steel via a surcharge system.  Such has been the increase in nickel prices that the alloy surcharge is now the most important component of the prices of stainless

Traders and service centers in the key markets of North America, Asia and Europe are now trying to destock given the high prices and the stainless mills are having to reduce the base price.  In Europe the leading producer - Outokumpu - has already cut back production with the focus of the reduction on the high nickel containing grades of stainless (the 300 series).  We expect to see further cutbacks in the summer months.

At the same time substitution pressures are also affecting the use of nickel by the stainless industry.  Posco the leading Korea producer has developed a grade of stainless (ferritic) which contains no nickel that will compete with the high nickel containing 300 series.  

In China, Baosteel is producing more 200 series which contain 5-8% nickel at the expense of 300 series which contain 8-10%.  These just represent two examples of an increasing trend that is adversely affecting nickel consumption.  In response LME inventories of nickel have started to climb albeit from a low base.