October 12, 2016 / 11:32 AM / 9 months ago

Stronger stainless steel output seen sustaining nickel prices

4 Min Read

* Resurgence of 300 series stainless output is big story

* Chinese stainless output to rise 7.8 pct this year: CRU

* Philippines struggling to maintain exports anyway

By Pratima Desai

LONDON, Oct 12 (Reuters) - Nickel's rally is expected to be sustained by robust demand from China's stainless steel mills, a significant factor behind recent price gains which many think are mainly due to worries about supplies from the Philippines.

Stainless steel contains nickel and chromium which slows the rate of corrosion significantly. Normal, or carbon, steel without nickel or chromium rusts easily.

It is used in infrastructure such as bridges and structural beams, household items such as cutlery, drums for washing machines and kitchen sinks. Oil pipelines and medical equipment are also made out of stainless steel.

Demand has been growing due to Chinese infrastructure investment and higher living standards mean stronger consumer demand for domestic goods made out of stainless steel.

Benchmark nickel is up more than 40 percent since hitting a 12-year low of $7,550 in February.

Recent data from the International Stainless Steel Forum showed Chinese output at 11.73 million tonnes between January and June, up 7.9 percent from the first six months of last year.

Beneath those numbers is another story; rising output of 300 series stainless containing around eight percent nickel at the expense of 200 series with only 1-2.5 percent nickel and 400 series which contains no nickel.

"The big story this year is the resurgence of 300 series production in China, possibly a structural shift," said Jim Lennon, founder of Red Door Research, adding it would support nickel for some time.

Stainless steel producers switched to 200 or 400 series when nickel surged to record highs above $50,000 in May 2007.

But at around $10,500 the cost of using nickel is no longer prohibitive.

CRU Group estimates Chinese stainless steel production will rise 7.8 percent this year to 23.2 million tonnes, but expects growth next year to slow to 2.1 percent.

"We expect output of 300-series stainless steel to rise in 2017, benefiting from the growth in overall stainless production." said CRU analyst Olivier Masson.

About two-thirds of nickel demand estimated at around 1.9 million tonnes comes from stainless mills; a large proportion of these are in China where nickel imports rose nearly 45 percent year-on-year in August to more than 29,000 tonnes.

Some of the impetus for higher prices came from an environmental crackdown in the Philippines -- top nickel ore and concentrate exporter to China. But this could be offset by higher supplies from Indonesia which is looking at amending the ban on unprocessed ore.

The Philippines shut 10 mines in August and last month recommended another 20 be suspended -- 12 of them nickel. However at end-September government said it would give mines time to address problems -- a softening of its stance.

"The Philippines have been struggling to maintain exports anyway. Production is down partly because of reserve depletion, they've been exporting from stockpiles," Lennon said.

Between January and August the Philippines exported 18.7 million tonnes of nickel ore and concentrate to China, a 21 percent drop from the same period last year.

Citi analyst David Wilson is not convinced disruptions in the Philippines will have a lasting impact and said anti-dumping duties on Chinese stainless in the United States and Europe would limit its exports.

But sources say Chinese stainless has already been finding its way to other countries in Asia such as Taiwan.

Editing by Ruth Pitchford

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