Nickel Prices in Cellar, Long-Term Story More Upbeat - BMO

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". . . lethargic supply growth will prove to be a key factor supporting long-term nickel price. . ."

The combination of very poor demand and insufficient production cuts are expected to pull the nickel market into a material surplus of 36kt this year, prompting BMO Capital Markets to reduce nickel price forecasts by 20% to $4.60/lb this year and by 21% to $5.50/lb in 2010.

Inventories are projected to increase for the third consecutive year in 2009, keeping prices low until 2010, BMO Capital Markets Global Commodity Strategist Bart Melek forecast.

BMO expects nickel will trend upward to $8.50/lb by 2013-the price needed to balance supply with demand over the long term. Melek advised, "Both producer discipline and growing consumption are expected to rebalance supply/demand conditions toward equilibrium over the longer term."

"Given the weakness in nickel demand, the planned sharp production cuts will only turn a potentially large nickel surplus into a decreasing supply overhang this year-not a balanced market," Melek said. "More producer restraint must be forthcoming if prices are to stabilize in the medium term. Producers not only need to balance supply with demand, but they must unwind inventories as well."

Melek forecasts a poor nickel outlook for the next 18 months "amid credit-crisis-induced slump and plunging stainless melting rates.

As most nickel producers are losing money in a very tight credit environment and difficult capital market, BMO expects a "hefty supply-side response," accounting for 25% of 2008 production.

"Indeed, nickel producers have announced some of the deepest cuts of refined metal output in the base metals ever, totaling some 360 ktpa for 2009."

The good news is that the lethargic supply growth will prove to be a key factor supporting long-term nickel price, according to Melek, who suggests that "many currently proposed projects will never be developed and existing facilities will continue to cut production."

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