Nickel's fate depends on China

So, the fall in demand from auto makers in the west and a huge rise in China have complicated the nickel prices. Some 65% of nickel goes into making stainless steel.

In the west, stainless steel mills continue to report poor sales and idled capacity. However, the nickel price has been powering ahead in spite of rising inventory levels.

ThyssenKrupp, Germany's biggest steelmaker, said in November it would cut stainless steel output by 25% in the first half of this year as weakening demand from car-makers and builders hits sales.

Finland's Outokumpu Oy, the world's fourth biggest stainless steel maker, last month cut its fourth-quarter profit target, while Spain's Acerinox is on a 50% capacity reduction for 2010.

Not only are mills reporting generally poor stainless sales but producers are continuing the gradual migration from nickel containing 300 series grades to low or zero nickel containing 200 and 400 series grades.

Just this week, Baoshan Steel, China's largest steel producer and second largest stainless producer, announced it would reverse its 60/40 ratio of nickel containing to non-nickel containing grades in an effort to boost profitability and cut costs.

So why should nickel prices be so strong when demand appears so weak? Well at the same time western demand has been falling, demand for stainless steel in China has been rising. Both Baoshan Steel and the country's number one producer, Shanxi Taigang Stainless have said they intend to increase overall stainless production in 2010 to meet continuing strong domestic demand. So the reality is that there is a market of two halves, weak in the west and strong in the east, or at least strong in China.