June 29, 2012 / 1:04 PM / 8 years ago

Nickel supply glut keeps premiums under pressure

* Premiums quoted in a 15- to 25-cent range

* Overhang of metal limiting spot mart trade

* Pick-up in demand seen by late summer

By Chris Kelly

NEW YORK, June 29 (Reuters) - U.S. nickel premiums have fallen below 20 cents per lb for the first time in more than two years, market participants said, as an overhang of supply has slowed spot activity.

“In the higher volume arena, the bigger stainless mills are able to buy at the sub 20-cent level today,” one physical dealer said. “Producers have an overhang of material without a lot of spot business coming in to take any additional tonnages they might have.”

Most participants pegged premiums for melting-grade nickel in a range of 15 to 25 cents per lb, down from a first-quarter range of 20 to 25 cents, while some small-lot spot deals were being quoted as high as 35 cents.

“There are great (economic) uncertainties and people are not buying too much further out, but they still need metal and are buying it for prompt delivery,” a second dealer said.

Still, suppliers are said to have enough nickel on hand, and are more willing to move it in order to avoid getting caught long the metal.

“If you’re Vale or Xstrata or Norilsk Nickel, anything you have you’re going to want to move because you know there’s going to be a sufficient follow-up of material coming through to replace what you’re selling today,” the first physical dealer said.

The free flow of nickel this year is a far cry from 2010, when a year-long work stoppage at two of Vale’s Canadian operations tightened North American supply and powered premiums to records well above $1 per lb.

But with Vale’s Canadian operations back up and running at full capacity, the Rio de Janeiro-based miner has remained aggressive in the spot market, undercutting trade offers and keeping a firm lid on premiums, sources said.

“It’s only gotten worse this year because they’ve got Onca Puma on board, plus their various other grades from Asia, so there’s a lot of units in the market,” a European-based dealer said.

Vale’s Onca Puma project in Brazil has capacity to produce 52,000 tonnes per year of ferro nickel.

London Metal Exchange nickel inventories are up nearly 19 percent this year, another sign the market is well covered.

“The stainless mills have got their frame contracts and they don’t need much additional, so we’re not seeing a lot of spot inquiries. That’s why the premiums are under pressure,” th e European trader said.

The stainless steel industry accounts for more than 60 percent of nickel demand.

Global steel production growth slowed in May, recent data from the World Steel Association showed, with output expected to remain sluggish in the coming months as weak economic growth erodes demand.

Compounding the sluggish state of the U.S. physical market, China has been buying less nickel this year.

According to the latest official customs figures from China, imports of refined nickel totaled 48,720 tonnes in April, down nearly 30 percent year-on-year.

Still, sources do not anticipate premiums falling much further, with some even expecting a pick-up by late summer.

“You’re probably looking at a month to six weeks of more weakness in the market, but once you get to second half of August, I would anticipate some better buying in the fall and premiums might actually move up a bit,” the fi rst physical dealer said.

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