Speculation on both sides is driving the stainless steel market higher. Although global demand is growing, there is insufficient impetus in the major consuming regions to justify the huge increases in raw materials costs that we are witnessing.

The USA, Western Europe and Japan together account for about half of global stainless consumption, and real demand in all these regions was fundamentally sluggish last year. In some countries, such as Japan, the auto industry did rather better - but that industry's requirement for stainless is mostly 400-series ferritic materials which would not have a bearing on nickel demand. End-use industries for austenitics, like construction and appliances, were unexciting. Of course there is growth in stainless demand elsewhere, especially China.

There has been a sizeable reduction in global nickel stocks, and the metal's price rose by 130 percent during the last year. There is also a considerable amount of conjecture in the market. It was speculative dealing which pushed LME nickel through the $US 17,000 per tonne level in early January, and the price quickly subsided again. At the time of writing it was looking rather steadier at just below $US 15,000 per tonne.

Although inventories held by stainless steel stockholders and service centres do not seem to have risen excessively, there is fairly clear evidence of end-users ordering more than they need for day-to-day consumption. Some consumers have been jinxed by the run-up in the nickel price, and bought in advance for fear of a shortage.

It is to soon to say that it will all end in tears - as users who are replete with stocks hold off from buying and the reduced offtake puts stainless prices into retreat.

Forecasts of a growing nickel supply deficit may keep the metal's price firm. Current LME figures probably contain a premium based on the expectation of a labour strike at Falconbridge in Canada. If this is averted, nickel could weaken. With stainless production and real consumption set to continue growing this year, the downside for the nickel price, and hence for alloy surcharges, looks quite limited.

Source: MEPS - Stainless Steel Review