Nickel and zinc prices have charged to their highest levels this year as Chinese steelmakers ramped up activity in response to their government's stimulus package.
Three-month prices – the market benchmark – for nickel on the London Metal Exchange hit $20,495 a tonne on Monday, up 75 per cent this year, with zinc reaching $1,920 a tonne, gaining 59 per cent in 2009.
In comparison, copper prices have doubled this year. Zinc and nickel are playing catch-up but the rally for both metals has gained significant momentum in recent weeks.
Nickel prices followed a rise of 31.4 per cent in the first half of the year with an increase of 33.3 per cent in the second half so far.
Similarly, zinc rose 28.2 per cent in the first half but has gained 24 per cent since the end of June.
Stainless steel accounts for about 70 per cent of nickel usage while more than half of all zinc production is used to galvanise metals such as steel or iron to prevent corrosion.
As steel demand in the west has been extremely weak this year, China's stimulus package has been critical for both the zinc and nickel markets, the two metals playing a key role in steel production.
Global stainless steel output has dropped by almost a third in the first four months of the year compared with the same period in 2008.
But in China, the government's stimulus plan fast-tracked many infrastructure projects, helping steel production rise to 601m tonnes?(annualised) in June, up 42 per cent from October's trough of 423m tonnes.
As a result, capacity utilisation at China's steel mills has jumped to an average of 91 per cent compared with 67 per cent in October.
Goldman Sachs says Chinese steel prices could rise rapidly if utilisation rates remain high. This optimism is also reflected in upgrades to analyst price forecasts for nickel and zinc.
Michael Widmer, metals analyst at Bank of America Merrill Lynch, recently raised his average 2009 price forecast for nickel from $12,500 to $14,370 and for zinc from $1,400 to $1,480.
For 2010, Mr Widmer upgraded nickel's price average from $14,000 to $18,500 and zinc from $1,750 to $1,800.
Rising steel production in China has driven a huge increase in nickel imports, which reached 120,000 tonnes in the first half of 2009, more than double for the same period last year.
This surge in Chinese imports could push the nickel market into a supply deficit for the remainder of the year.
Mr Widmer cautions that China's nickel imports are running at unsustainable levels as demand has run ahead of actual usage, leading to a build-up in unreported stocks.
But outside China, steel producers have begun announcing plans to increase output given the pending economic recovery.
"There is significant scope for stainless steel mills in the western world to increase production, especially in the light of the record low levels of inventory at stockists," says JPMorgan's Michael Jansen.
Industry leaders such as Lakshmi Mittal, chairman of ArcelorMittal, the world's largest steel company, also expects steel to make a strong recovery next year.
Mr Mittal forecast recently that global steel demand would rise by at least 10 per cent in 2010.
This year's revival in zinc prices has also been supported by China.
Government restocking has now ended but it helped push imports of refined zinc to 474,000 tonnes in the first half of this year compared with 182,000 tonnes for the whole of 2008.
Mr Jansen cautions that stocks held by Chinese smelters are "inordinately large" and that there is an additional 1m to 1.5m tonnes of production capacity that could be restarted if prices rise strongly.
However, the longer term outlook for the zinc market does appear positive.
Goldman Sachs identifies zinc – along with copper, cotton and soyabeans – as the four commodities with most leverage to China as it consumes about a quarter of global output of each and is a structural net importer.
"The structural shortage of zinc mine supply has not been eliminated and this should impose constraints on refined [zinc] production once the global economic recovery is in full swing," says Mr Widmer, who expects the market to return to a supply deficit by 2011.
Source: Financial Times
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