In a pickle over nickel

JP Morgan is taking on Deutsche Bank and Merrill Lynch over the direction of nickel, according to this story by Bloomberg:

Nickel Price Outlook Divides Deutsche Bank, JPMorgan (Update3) By Chia-Peck Wong and Chanyaporn Chanjaroen

When it comes to nickel, the best performing commodity the past 13 months, JPMorgan Chase & Co. is determined to prove Deutsche Bank AG is full of so much hot air.

At stake is $55 billion of metal mined from New Caledonia to western Canada, and the rising cost of 300,000 stainless-steel products from General Electric Co. jet engines to kitchen sinks. More than $11 billion is riding on a Deutsche Bank call that nickel will appreciate again in 2007.


Prices of nickel, used to make stainless steel, have doubled in seven months to $37,000 a metric ton, after reaching the highest in more than two centuries of trading on Jan. 26. Nickel soared during the past five years as China stepped up stainless-steel production and overtook Japan as the world's largest supplier of the commodity.

The market is "over-inflated," says Jon Bergtheil, the head of global metals strategy at JPMorgan in London and an industry analyst for three decades. "Nickel's fall will be worse than the pace copper has seen," dropping at least 25 percent this year, he said.

Nonsense, says Deutsche Bank analyst Michael Lewis, who told customers on Jan. 12 that nickel is the favorite pick among industrial metals because producers can't keep up with demand. Germany's biggest bank raised its forecast for average nickel prices to about $31,500 in 2007 and to $31,000 in 2008. Nickel in 2006 averaged about $24,150.

"The ramp-up in Chinese stainless steel capacity in 2007-08 is now expected to sustain strong demand growth for nickel at elevated levels," the bank said in a report. Lewis, who works in London, couldn't be reached to comment.


Merrill Lynch & Co. analyst Daniel Hynes says prices will tumble and average $23,700 a ton, 40 percent less than today. Hynes, who works in Sydney, spent six years with nickel producer WMC Resources Ltd. before it was bought by BHP Billiton Ltd., the world's biggest mining company.

"Nickel gains came after the Chinese put up a large amount of stainless-steel capacity," said Bergtheil, 52, of JPMorgan, the third-largest U.S. bank. "Now we are reaching the stage of having too much stainless steel. The Chinese government has tightened regulations to rein in overheated industries, and one of the latest aims at stainless steel."


Some analysts say China has found an alternative in nickel pig iron, a lower-cost metal mined in the Philippines. The substitute may cause imports of refined nickel by China to drop 11 percent this year because it costs 40 percent less than the refined metal, said Xu Aidong, a metals analyst at Beijing Antaike.

Each time nickel prices doubled in a year during the past two decades, as they did in 2006, they've fallen the next year.

A drop in nickel prices would hurt Russia, Canada and Australia, the world's three biggest exporters. Profits would suffer at producers including Cia. Vale do Rio Doce, Brazil's second-largest company, and OAO GMK Norilsk Nickel, where shares have gained 14 percent this year.