WSJ March 26: How a Supply Pull Drove Nickel Rally

How a Supply Pull Drove Nickel Rally

• By LIAM PLEVEN

Bloomberg News

A relatively small drawdown of nickel supply has helped stoke a sharp rally this year. Here, truckload of copper and nickel ore in Ontario in 2008.

It seemed like just another obscure shift in an obscure market. But one early 2010 move by Stratton Metals Ltd. helped set in motion an unexpected surge in the price of nickel, a metal used to make stainless steel.

Stratton, a major nickel dealer in London, pulled about 4,000 tons of the metal from warehouses to feed demand from its steelmaker customers in the first months of 2010.

It was a fraction of the roughly 160,000 tons of the metal lying around in exchange warehouses. But Stratton's orders helped trigger a classic price squeeze that pushed nickel up 34% within weeks—a surge that caught analysts, traders and companies flatfooted. The sudden move quickly rippled through to users of the metal—the world's stainless steel makers—which pushed up the prices of their products.

The result was "a short-term scramble" in the nickel market, says Jim Lennon, a commodities strategist with Macquarie Group.

The sharp rise in nickel prices demonstrates how even a slight shift in demand and supply can roil tiny commodities markets like those for nickel, orange juice and cocoa. Nickel is roughly a $13 billion market, while the crude-oil market is $280 billion, based on the open interest on major exchanges.

Traders interpreted the drawdown as a sign of rising demand that, in turn, sparked worries that supplies might suddenly get tight. A chunk of the warehoused metal was tied up by banks like Deutsche Bank AG and Barclays PLC, which had pledged to deliver it to customers at a later date, according to people familiar with the matter. Mine strikes and shutdowns were also keeping supplies tight. Analysts say those dynamics are likely to last for some time, possibly pushing prices up more than 10% on top of the gains already made.

Overall, nickel demand rose 5.5% world-wide in January, according to the International Nickel Study Group in Lisbon.

Yet between Feb. 1 and Feb. 12, the volume of nickel requested from warehouses nearly quintupled, according to data at the London Metal Exchange, the main trading venue for nickel. The request from Stratton Metals accounted for much of that.

Industrial buyers moved to lock in prices before they climbed further, and traders, who had bet that the slow economy would tamp down demand, reversed course.

"Only last week, we were calling for a top in nickel," Jordan Kotick, head of technical strategy at Barclays Capital, wrote in a March 2 research note. "However, events since have proved us wrong, and today we are changing our view."

Nickel is slightly higher since then, and some analysts now expect a further rise to $25,000 a ton or more, from Thursday's settle price of $22,675 a ton in the futures market.

On the supply side, the financial crisis had helped to curtail nickel production, as some facilities were mothballed, partly due to a sharp decline in nickel prices that began in 2007. In addition, workers at a major nickel mine in Canada operated by a unit of Brazil's Vale SA have been on strike since last year.

But the orders that Stratton Metals filled were a signal of a slight revival recently in the market for stainless steel. And because stainless-steel makers are the main users of nickel, the nickel rally has ricocheted back to stainless-steel makers, as manufacturers in the U.S., Europe and Asiahave increased prices in recent weeks.

A.K. Steel Corp., of West Chester, Ohio, increased the nickel surcharge by nearly 16% for many stainless-steel grades for April delivery, compared with January. Acerinox Group, of Madrid, imposed a 4% increase, due to material costs.

Nippon Steel Corp., of Tokyo, is also charging for more-expensive nickel, a spokesman said in an email. If prices keep rising, "we are afraid our customers may try to shift to other materials," said the spokesman, who called the price increase "speculative" and "clearly undesirable for us."

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European Pressphoto Agency

As nickel prices have risen, so, too, have the costs of making stainless steel. Here, stainless-steel kitchenware gets polished in Mumbai on Tuesday.

Other firms are also bracing. Baker Hughes Inc., an oil services company based in Houston that uses nickel in equipment for oil and natural-gas wells, intends "to pass through increases in material costs to our customers," a spokesman said in an email.

Whirlpool Corp., the appliance maker based in Benton Harbor, Mich., said in a Securities and Exchange Commission filing that it expects costs to rise by about $200 million to $300 million this year because of higher prices for various materials, including nickel. In the filing, Whirlpool said it expects to offset the increases by, among other things, raising productivity and launching new products.

Stainless-steel makers were seeking more nickel earlier this year for a few reasons. A rise in stainless-steel orders is what spurred Acerinox to buy more in late January and early February, a spokesman said. Seasonal restocking contributed.

But with the economic recovery still uncertain, some believe the nickel rally has limits. Michael Jansen, an analyst at J.P. Morgan Chase, wrote in a research note last week that "the rally is unlikely to be sustained," in part for a reason that higher nickel prices may only accentuate: "underlying demand for stainless [steel] still remains soft."

Write to Liam Pleven at liam.pleven@wsj.com

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