Nickel prices touched a peak of $22,765 per ton for spot delivery on the London Metal Exchange last week, before correcting 5.8% this week. The last time nickel traded at these levels was during June 2008, nearly 20 months ago. Prices remained suppressed during most of 2009, averaging $14,700 per ton. The metal is currently trading at $21,445, having gained nearly 22% within the last month. However, experts appear to be divided on where prices are headed going forward. Market research firm Roskill estimates nickel prices to average $20,000 per ton during 2010 and increase further to $22,000 between 2010 and 2012. However, analysts polled by Reuters expect an average cash price of $18,185 ton for 2010 and $19,069 a ton for 2011. One investment vehicle to play the nickel story clearly appears to be Barclays' ( BCS) Capital Inc iPath ETN DJ-AIG Nckl ( JJN) ETF, having gained more than 20% this year itself and up about 50% since early December 2009. The exchange-traded fund is currently trading at $33.1, compared with a 52-week low of $14.3 in March 2009. According to Anton Berlin, director of the world's largest nickel producer, Norilsk Nickel, prices must rise by at least another 5% -- for a sustained period -- to prompt miners to restart capacity idled by the global economic slowdown. "I wouldn't expect another wave of relaunches until the price is substantially higher. I'm guessing it should be at least $23,000 to $25,000 (a ton)," Berlin said at the Reuters Global Mining and Steel Summit on March 9. However, other miners seem to think otherwise, having already announced plans to restart or ramp up production. Vale's ( VALE) Canadian unit Vale Inco, which previously halted production due to labor disputes, announced it will resume production at its nickel mining and milling operations at Voisey's Bay using non-striking labor. Another company looking to add to its growing nickel asset base is First Quantum Minerals. It recently closed the acquisition of the Ravensthorpe nickel mine in Australia from BHP Billiton ( BHP) Risks of supply overhang even as inventories decline and consumption grows. According to the International Nickel Study Group (INSG), world nickel production will increase 12.5% during 2010 to 1.44 million metric tons, driven by higher purchases by Asian stainless steel producers, especially those in China. Stainless steel production drives around two-thirds of total nickel consumption. Production of crude stainless steel is estimated to increase 8% to 27Mt in 2010 and to 30Mt in 2011, with emerging markets such as China and India driving the demand. INSG estimates nickel consumption to increase 12% in 2010 to 1.35 million tons, benefitting from the growth in stainless steel production. Global nickel inventories, which were building up since July 2009, have dropped for the first time this month, albeit only marginally. After increasing from 113,442 metric tons at the end of August 2009 to 162,666 metric tons at the end of February 2010, official stocks at LME warehouses have now dropped to 159,702 metric tons.
While this may signal a turnaround in consumption, nickel prices may not improve just yet. The current global inventory levels continue to be at multiyear highs. For instance, LME stocks stood at just about 4,700 tons the last time nickel hovered around $50,000 per ton. An important factor that could temper China's imports from global nickel miners is the domestically produced nickel in Pig Iron (NPI), a lower grade nickel produced mainly in China and used by domestic stainless steel mills. Experts reckon that a rapid growth in NPI production could crowd out demand for high-grade nickel, even as stainless steel production increases. New projects, including Vale's Goro project in New Caledonia and the Ambatovy project in Madagascar -- each producing 60,000 tons per year -- are set to increase global NPI production over the next couple of years.