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Record nickel supply expanding glut thwarts rally
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Sunday, 26 Feb 2012
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Bloomberg reported that mining companies and refineries are producing more nickel than at any time in history, expanding a glut that threatens to reverse this year's rally.

Barclays Capital estimates that production will exceed demand by 45,000 tonnes, a 73% jump from 2011. That's equal to 46% of stockpiles tracked by the London Metal Exchange. According to Morgan Stanley, refined output will rise 12%, the most in at least eight years. The median of 11 analyst estimates compiled by Bloomberg shows that prices, which rose 7.8% to USD 20,170 a tonne in 2012, may fall as much as 13% to USD 17,630 a tonne by December 31st 2011.

Metals have returned to a bull market from a 22% slump in 2011 on an improving outlook for global growth with manufacturing in the US capping the biggest two month increase in more than two years in January 2012 and unexpectedly gaining in China. With new supply expected from Australia to Madagascar to Brazil, consumption still won't expand fast enough to absorb the extra metal. Most markets for stainless steel, accounting for 76% of nickel demand, remain depressed.

Mr Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, said that "We'll get more and more supply over the course of the year. We expect huge surpluses for nickel not only this year, but next year, and probably in 2014. It's mainly due to an increase in supply, but on the other side the stainless steel industry is facing a tough time."

Morgan Stanley estimates that refined production will reach almost 1.77 million tonnes in 2012 as demand increases 10% to 1.72 million tonnes, providing surpluses for at least two more years. Stockpiles in warehouses monitored by the LME rose 17% to 97,308 tonnes since November 9th 2012. Orders to withdraw metal from inventories declined 58% since reaching a seven year high in August 2011.

According to Morgan Stanley, additional supply will come this year from Vale SA's Onca Puma and Anglo American Plc's Barro Alto mines in Brazil and Glencore International Plc's Murrin Murrin and First Quantum Minerals Limited's Raventhorpe in Australia. Projects by Vale in New Caledonia and Sherritt International Corporation in Madagascar will take total production from new operations to 117,000 tonnes in 2012.

Lower prices may hurt earnings of producers. OAO GMK Norilsk Nickel, the biggest producer, will report a 5.8% decline in net income in 2012 to USD 4.49 billion. Nickel accounted for 53% of its sales in 2011.

Norilsk expects nickel to average USD 19,000 in its 2012 budget, two people with knowledge of the matter said last month, down 17% from the LME's benchmark three month contract average of USD 22,865 in 2011.

Japan, the second biggest consumer of the metal, contracted an annualized 2.3% in the fourth quarter, more than economists estimated. The International Monetary Fund cut its 2012 growth forecast on January 24th 2012 to 3.3% from 4% and warned that Europe's debt crisis threatened to derail the world economy.

Mr Nick Trevethan, a senior commodities strategist at Australia & New Zealand Banking Group Limited in Singapore, said that "This will be a difficult year."

(Sourced from Bloomberg & www.businessweek.com)

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