Nickel Price to Stay Strong on Chinese DemandNickel Price to Stay Strong on Chinese Demand, Alloys Recovery - Inco
By Canadian Press
20 Apr 2005 at 04:54 PM EDT
TORONTO (CP) -- Inco Ltd. believes the vigorous demand for nickel which pushed prices last quarter to their highest since 1989 will continue beyond this year.
China's nickel consumption has grown by more than 20 per cent in each of the past five years and shows no sign of slowing, CEO Scott Hand told Inco shareholders at the company's annual meeting Wednesday.
Chinese demand during the first two months of this year was more than double that of January and February 2004, said Hand, who was paid $2.62 million US in 2004 and received shares valued at $1.3 million US, as Inco recorded its highest revenues in 103 years of business.
''We believe China's long-term impact could be unlike anything the nickel market has ever seen,'' Hand said.
Inco, the world's second-largest nickel producer, sold $400 million worth of metals to China last year. That's more than five per cent of Canada's total exports to the rapidly developing nation, Hand said.
Additionally, Hand said the market for high-nickel alloys _ used in aerospace applications, oil and gas processing, and land-based gas turbines for energy _ has recovered.
He said hybrid-powered vehicles _ which use nickel-based batteries _ are no longer a fringe product, with worldwide production expected to grow from 200,000 units this year to more than one million by 2010.
Those factors, combined with ravenous demand from India and China, bode well for nickel's future, Hand said, telling analysts in a conference call that ''the bloom is not off the rose.''
However, Peter Goudie, executive vice-president of marketing, warned that nickel prices are not stable.
''Volatility is unavoidable,'' he said during the call, observing that European and Japanese markets are showing signs of softness, and some customers are adjusting to high prices by substituting away from nickel.
As certain markets appear weaker, various analysts will say prices are about to tumble, Goudie said.
But Inco forecasts that more than 25,000 tonnes of nickel demand will not be met this year as supply remains tight, largely because of China. The company is turning away some sales because it doesn't have enough product.
''It's a simple equation,'' Hand said. ''Higher (Chinese) income levels, rapid urbanization, an expanding middle class, a population with a great love for stainless steel. Add them all up and it equals a very strong market for nickel.''
About 70 per cent of the world's nickel production is used in stainless steel.
''Nickel prices have been up here in the sky for almost two years,'' said Ron Coll, an analyst with Jennings Capital Inc.
The average price last year was $6.27 US per pound and Coll is forecasting an average price of $6.50 US per pound this year and next.
''Right now it's trading at $7.25, so my $6.50 for the next quarter might be too conservative,'' he said.
But the good times can't last forever, Coll added.
''Metal prices are going to keel over and we are going to see $3.50, $4 nickel prices again,'' he said. ''It's just when it's going to happen.''
Those comments echoed Inco chief operating officer Peter Jones, who said ''even nickel prices can't defy the laws of gravity _ they will come down and we must have a cost structure to deal with that.''
The company will generate $1 billion to $1.5 billion US in cash flow for the next two to three years, Coll said, allowing it to sock away a large bundle of cash.
Inco, which reports in U.S. dollars, announced Tuesday it earned $313 million in the first quarter, compared with $254 million in the same quarter of 2004, and is reinstating the common share dividend suspended in 1999.
Inco, which employs 11,000 people, says 2005 is a transition year. Next year, its Voisey's Bay project in Labrador will begin its first nickel deliveries.
With Inco's increasing cash flow, analysts questioned whether the company is looking at any large acquisitions. The company said it is always looking for nickel properties, but denied Australian reports that it's considering a large acquisition in that country.
Coll said there are few nickel properties available, making it difficult for Inco to grow by acquisition.
Shares in Inco (TSX:N) closed up one penny at $46.40 Cdn Wednesday in Toronto.