When it comes to nickel, the best performing commodity the past 13 months, JPMorgan Chase & Co. is determined to prove Deutsche Bank AG is full of so much hot air.
At stake is $55 billion (Rs242,605 crore) of metal mined from New Caledonia to western Canada, and the rising cost of 300,000 stainless steel products from General Electric Co. jet engines to kitchen sinks. More than $11 billion (Rs48521 crore) is riding on a Deutsche Bank call that nickel will appreciate again in 2007.
Prices of nickel, used to make stainless steel, have doubled in seven months to $37,000 a tonne, after reaching the highest in more than two centuries of trading on 26 January. Nickel soared during the past five years as China stepped up stainless-steel production and overtook Japan as the world’s largest supplier of the commodity.
The market is “over-inflated,” says Jon Bergtheil, the head of global metals strategy at JPMorgan in London and an industry analyst for three decades. “Nickel’s fall will be worse than the pace copper has seen,” dropping at least 25% this year, he said.
Nonsense, said Deutsche Bank analyst Michael Lewis, who told customers on 12 January that nickel is the favorite pick among industrial metals because producers cannot keep up with demand. Germany’s biggest bank raised its forecast for average nickel prices to about $31,500 in 2007 and to $31,000 in 2008. Nickel in 2006 averaged about $24,150.
“The ramp-up in Chinese stainless steel capacity in 2007- 08 is now expected to sustain strong demand growth for nickel at elevated levels,” the bank said in a report. Lewis, who works in London, couldn’t be reached to comment.
Rising nickel use sent inventories at the London Metal Exchange to the lowest since July 1991. Nickel gained 147% in 2006 and has risen 12% this year. Prices are five times higher than the average of $6,945 a tonne during the 1990s. More than $11 billion of nickel futures are outstanding on the LME, which sets world benchmark prices.
Metals prices are so high that the US Mint last year banned exports of nickels to prevent scrap merchants from melting down coins in developing countries. The 5-cents coin, which is 25% nickel and 75% copper, contains metal currently valued at 7 cents.
Chinese companies will boost production 37% this year to about 7 million tonnes, from 5.1 million tonnes, according to Beijing Antaike Information Development Co., a government-funded research group.
Some analysts say China has found an alternative in nickel pig iron, a lower-cost metal mined in the Philippines. The substitute may cause imports of refined nickel by China to drop 11% this year because it costs 40% less than the refined metal, said Xu Aidong, a metals analyst at Beijing Antaike.
A drop in nickel prices would hurt Russia, Canada and Australia, the world’s three biggest exporters. Merrill Lynch & Co. analyst Daniel Hynes says prices will tumble and average $23,700 a tonne.