Nickel Prices May Have Peaked

Nickel, the best-performing commodity this year, might witness a decline in price as new mining supply threatens to outstrip demand and as China beefs up production of low-cost alternatives like nickel pig iron.

Nickel for spot delivery on the London Metal Exchange touched a low of $16,976 a ton on Feb. 5 and a high of $27,227 a ton on April 20, a 60% increase in a matter of two months. The metal is currently trading at $26,244 a ton.

The iPath Dow Jones-UBS Nickel total return sub-index(JJN) declined 5% during the past week in line with other metal exchange-traded funds. Market Vectors Steel(SLX), iShares Dow Jones US Basic Materials INdex(IYM) and SPDR S&P Metals and Mining(XME) declined 8%, 3% and 6.5%, respectively.

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But the worst may be yet to come. Nickel prices might cool down further as various factors like excessive new supply, increasing production of nickel pig iron in China on rising domestic stainless steel production and China's recent reserve rate hike for banks play their part.

Higher pig iron production and rising global inventories were the main triggers for a Nickel price slump following the record run-up in prices to above $52,000 a ton during May 2007.

According to analysts polled by Bloomberg, the nickel price is expected to decline by 19% to $21,250 a ton by the third quarter of 2010. This prediction is based upon excess supply that is likely to hit the market. "The higher the price, the more likely a deluge of supply comes to market," Nick Moore, head of commodity strategy at RBS, told Bloomberg.

The fact that some of the biggest players are ramping up production to exploit the recent price surge is a glaring example. Vale(VALE) is scheduled to begin production at its $4.3 billion Goro Nickel mine in New Caledonia this year. The mine is expected to produce 60,000 tons of nickel annually, accounting for about 5% of global production.

The company is also planning to raise production at its Clydach nickel refinery in Wales to full capacity by taking semi-processed metal from its Sudbury facility that has been shut for almost 10 months because of a labor strike.