Chinese buying boosts nickel ::Macquarie Research,

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Chinese buying boosts nickel
Feature article
 We review the reasons for the recent recovery in Chinese import demand for
nickel. In our opinion, this is down to reduced availability of higher-grade
nickel pig iron at a time of strong demand for this product. As a result, in the
short run imports of nickel look set to rise strongly.
Latest news
 Base metals recouped some losses on Thursday as markets regained
confidence on a potential European rescue package. This was despite the
Philadelphia Fed’s manufacturing activity index declining further in
September, although the rate of decline moderated to -17.5 (from -30.7).
Copper rose 1% to $8,686/t as miners at the Grasberg mine in Indonesia
followed through on threatened strike action, with concentrate loading halted.
Precious metals were the day’s big losers, with gold giving up 2% to move
back below $1,800/oz.
 Reuters has reported that The Democratic Republic of Congo’s state-owned
miner, Geçamines, plans to invest almost $1bn in an effort to re-establish
itself as a major copper-cobalt producer. The company hopes to produce
160kt of copper in ten years, compared to 18kt in 2010. While this is not large
in terms of the copper market, its plan to fund this through a review of existing
joint ventures in the country will raise some concerns over investment in the
mining space. The DRC is currently responsible for over 40% of cobalt units
mined globally and over 50% of supply growth in this market.
 Macquarie attended an important seminar in Germany this week convened by
Oryx Stainless, the world's third-largest stainless steel scrap dealer (which
last year, sold 450kt of scrap containing approximately 35kt of nickel). The
seminar was attended by a selection of leading nickel and stainless steel
stakeholders. The centre point of the discussions was a presentation of the
results of a detailed study on nickel price drivers by Professor Peter Posch of
the University of Ulm.
 Professor Posch reviewed historical industry prices and monthly INSG
supply/demand data going back to 1996. After subjecting the data to
econometric analysis, he concludes that 75% of the price movement can be
explained by the fundamentals rather than speculation. Using the time-series
results, he concludes that while speculation is a constant factor impacting
nickel prices, it is not the main driver, nor is it all in one direction – his model
suggests that "speculators" drove prices above fundamentally predicted levels
from 2003 to 2007, but from 2008 to January 2011 (when his analysis ended)
the impact of speculation has been to keep prices below the predicted levels!
 Discussion at the seminar focussed not so much on the level of the nickel
price but its volatility, which is viewed by the stainless steel industry as a
major problem. While speculators (mainly funds) are seen as the main drivers
of this volatility, the industry is also well aware that the ability of stainless
customers to cancel orders in a falling nickel price environment and then overorder
when prices are rising (due to the lag between changes in nickel and
stainless steel prices) also creates damaging volatility. The ability of
customers to cancel orders without penalty in effect gives them a "free option"
to destabilise the market.