Norilsk Nickel May Fall on Metal Outlook

Anticipated decline in nickel prices, despite the deficit supply scenario during the first four months, will likely weigh on Russian giant Norilsk Nickel.
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NEW YORK (TheStreet) -- Despite a supply deficit during the first four months of 2010, we anticipate nickel prices to decline during 2010 on demand concerns and supply additions.

Decline in nickel prices will likely weigh heavily on

Norilsk Nickel

, the world's largest producer of nickel, that has higher equity beta and higher revenues from nickel compared to the three mining giants,

Vale

(VALE) - Get Report

,

BHP Billiton

(BHP) - Get Report

, and

Rio Tinto

(RTP)

.

Despite a dividend yield of around 8.2%, Norilsk has an equity beta value of 2.19, higher than Vale's 1.38, BHP's 1.44 and Rio's 1.37. Hence, in case of a market correction, Norilsk will experience a sharp fall compared to the other three mining giants. In addition, Nickel accounts for around 49% of the company's revenues and the downside in nickel prices will weigh heavily on Norilsk stock prices.

Nickel, along with other base metals, is running out of favorable factors and the price decline will manifest in the second half of 2010. Concerns remain on China, which accounts for around 30% of total nickel demand. China's nickel imports could slump following the substitution with nickel in Pig Iron (NPI), the domestically produced lower grade nickel, by domestic stainless steel mills. More importantly, the demand for nickel may decline by the lower-than-expected stainless steel production in China.

Early this year, Vale's nickel production declined due to a strike at the company's Sadbury mine and uncertain production volumes at Talvivaara and Goro. However, the combined output at Goro project in New Caledonia and Ambatovy project in Madagascar is an annual 120,000 tons, and these mines are set to boost NPI production.

Meanwhile, Rio Tinto allocated $469 million to build the Kennecott Eagle mine located northwest of Marquette, Michigan. This mine has an annual capacity of 17,300 tons of nickel over the six years, further increasing supply. Rio Tinto has been looking for investment opportunities outside Australia,

on concerns related to "super" profit tax

.

Norilsk Nickel gained only 4.3% in comparison to the 8.2% appreciation in nickel commodity, so far this year. The sector ETF,

Barclay's

(BCS) - Get Report

iPath ETN DJ-AIG Nckl A

(JJN) - Get Report

is up.

Year-to-date Performance

Year-to-date, nickel prices are up 8.2% on the demand-supply gap. In comparison, copper, aluminum, lead and zinc declined 9.8%, 10.2%, 27.6% and 29.0%, respectively. Nickel will continue to outperform other base metals during 2010, because the declines for other metals will likely be steeper on wider demand concerns. For instance,

zinc metal will likely see a surplus of 418,000 tons for 2010

.

For the first four months of 2010, nickel demand outweighed supply by 16,000 tons, according to World Bureau of Metal Statistics. London Metal Exchange (LME) nickel inventories declined 4.7% to 138,504 tons in May from 145,314 tons in April. These trends supported the metal rally until the emergence of European debt crisis.

Nickel demand accelerated in the first fourth months of 2010, driven by strong demand from the stainless steel industry, the largest end-user worldwide. Stainless steel production accounts for approximately two-thirds of global nickel demand. As per the April estimate of International Nickel Study Group, nickel consumption during 2010 is likely to reach 1.39 million tons as against 1.22 million tons in 2009. We anticipate the demand to fall short of this expectation on the current uncertain demand conditions and supply additions.