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[MELBOURNE] A surprise jump in stainless steel production this year in China, the world's biggest nickel user, may reignite a rally in nickel prices as investors shift focus to demand from worries over Philippine supply.
China's output of nickel-bearing stainless steel, which uses more nickel than overall stainless steel, during January to July surged to 11.201 million tonnes, up 10 percent from the same period in 2015, according to UBS. Overall stainless steel output for the first seven months of 2016 was 8 percent higher than a year ago at 13.639 million tonnes, UBS said.
A forecast released in February by UK steel consultancy MEPS for Chinese output called for only a 1.7 per cent increase.
The pick up in China's stainless steel production could fan a rally in prices after they slumped in August when a steady stream of mine closures in the Philippines dried up and blunted concerns over contracting mine supply.
"Everyone has been focused on the supply side. People should also be paying attention to the demand side and that's looking rosier," said analyst Dan Morgan at UBS in Sydney.
Mills are making more series 300 stainless steel, used in finishings such as kitchen fixtures and construction, instead of lower quality 200 stainless steel typically used in items like cutlery, analysts said. The 300 series metal contains 8 to 10 per cent nickel, while the 200 series contains around 3 per cent.
"Low nickel prices plus a rejection by customers of low quality steel has seen a switch away from 200 series stainless towards 300 series," said analyst Jim Lennon of Macquarie.
China's nickel demand was set to expand by 90,000 to 100,000 tonnes in 2016, Mr Lennon said, as even producers of nickel pig iron, a cheaper substitute for nickel, use more of the metal in their feed after the supply of ore dropped because of low prices and an Indonesian export ban.
China accounts for some 53 per cent of global nickel demand, according to UBS.
Outside China, a lack of scrap is also forcing mills to take refined metal. The price of nickel in scrap was below 75 per cent of LME prices last year. This year it has been between 85 to 90 per cent, Mr Lennon said.
"We think global nickel use will rise by 5.8 per cent this year, much higher than for other metals," he said.
Fears in June of a wholesale ban on nickel ore exports from the Philippines, had pumped up nickel prices by a third to peak above US$11,000 a tonne on the London Metal Exchange by mid-August. But with no new closures, prices have crashed by 9 per cent to US$9,995 on Friday.
UBS' Morgan sees nickel prices averaging at US$4.75 a pound or US$10,472 a tonne in the fourth quarter.
Macquarie forecasts Philippine mine production will drop by 85,000 tonnes to 355,000 tonnes this year, trimming global 2016 supply by 3.3 per cent to 1.914 million tonnes. That will swing the nickel ore market into a deficit of 70,000 tonnes, its first in five years.