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Nickel traders, not market fundamentals, driving stainless steel prices, says MEPS

MEPS (International) : 02 March, 2011  (New Product)
Stainless steel basis prices are increasing, on top of a rapid climb in alloy surcharges over recent months, although there has been no significant upturn in real demand reported from any part of the world.
Of course, consumption continues to grow in the emerging nations, whose expansion was relatively unscathed by the financial crisis that commenced in 2008. There has been healthy economic activity for some time in countries with strong manufacturing industries, like Germany and Sweden, whose goods sell well in the developing world.

One important factor in the supply and demand equation has changed in recent years. The major stainless steel producers have substantially improved their systems for tailoring output to match consumption. They have refrained from their old practices of reverting to maximum production at the first sign of improved order intake. All the major western mills have operated at less than capacity since the recession. Now, as small improvements in demand combine with restocking and some speculative purchasing, availability becomes tighter and price hikes are justified.

While most input costs have grown steadily, as they will tend to do over time, it has been the value of nickel that has most dramatically affected stainless steel transaction figures in the last two years. Although there has been a slight shift in the supply/demand balance this has certainly not been sufficient to cause the rapid rise in London Metal Exchange nickel prices we have seen of late. Indeed, while predictions for production and consumption suggest that supply and demand will be in equilibrium in the medium term, the level of LME stocks rather indicates a surplus. Even though the current total of around 130,000 tonnes is down from a peak of over 160,000 tonnes in January 2010, today's figure is enormous, in a historical context. As recently as four years ago, the LME stock figure stood at less than 2,000 tonnes.

However, the technical indicators employed by commodities traders are more heavily influenced by the movement in the stock level than by the absolute tonnage. Furthermore, it is clear that commodities prices in general are not driven merely by the fundamentals of the individual materials. Most are primarily affected by the actions of institutional investors, who move in and out of different financial markets as their relative attractiveness ebbs and flows. Nickel's recent peak of over US$29,000 per tonne represents its highest price since the first half of 2008. It is no coincidence that others metals, and indeed other products such as oil, have also attained their highest values since that period in the wake of the global financial collapse.

Underlying demand may pick up sufficiently to stabilise stainless steel prices at close to their current levels. Otherwise, we may all too soon be on one of the downward slopes of the familiar rollercoaster.
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