Nickel- The Rising

The prices of Nickel are all set to make a mark after crashing hard in the month of May. LME Nickel futures prices closed at $ 21800 per tonne on 30th May 2008 declining by more than 20%. The trend is reversing fast and bargain hunting has begun in the futures market. Nickel outlook is strong in days to come.

Nickel is the most important metal from steel industry point of view. Nickel is primarily sold for first use as refined metal or ferronickel. About 65% of the nickel consumed in is used to make Austenitic stainless steel (also known as the 300 series). Another 12% goes into superalloys or nonferrous alloys. The remaining 23% of consumption is divided between alloy steels, rechargeable batteries, catalysts other chemicals, and plating.

Nickel Prices crashed both in international as well as domestic markets. LME saw a depletion from $ 28300 per tonne on 1st May 2008 to $ 21800 per tonne at the last trading day of the month, registering a decline of 23%. MCX Nickel for May month expiry was Rs 936.50 per kg on 31st May 2008 as against Rs 1161.50 at the start of the month, a fall of 20%. The prices are recovering thick and fast and in coming days the overall trend seems to be favouring growth. Looking at the LME inventories levels we found that the inventories have declined from 51432 tonnes since the initiation of May to 47238 tonnes till 11th June 2008, marking a fall of 8.1%.

Indian Steel consumption is growing at 12-13 % yearly, whereas the growth in production is less than 6 %. This is an indicator of rising demand for steel in the country. The Steel exports in 2007-08 were at 5 million tonnes, while imports stood at 7 million tonnes. Nickel, being the major raw material in Steel production is set to see increase in consumption and thereby higher prices. International Stainless Steel Forum (ISSF) expects that world steel production in 2008 would recover after never before seen stock draws, which followed the crash in nickel prices last year, leading to a 2.6% decrease in stainless steel in 2007.

International Nickel Study Group (INSG) studied the consumption pattern of Nickel, indicating that the consumption was strong till the first half of 2007. During the second half, the production of high nickel-content stainless steels declined in most parts of the world, reducing the consumption of primary nickel and nickel containing scrap. However, world primary nickel usage in 2008 is anticipated to reach a record level due to a recovery in nickel containing stainless steel production around the world and particularly in Asian markets including China. As per INSG, World primary refined nickel production was 1.44 MT in 2007, and is expected to increase to a record level of 1.54 MT in 2008. World primary nickel usage was 1.30 MT in 2007, and is estimated at 1.47 MT in 2008. For the year 2008 a broad based recovery of nickel usage is anticipated. Thereby, indicating that the demand will be strong.

China was the net importer of refined nickel and nickel alloy to the tune of 44661 tonnes in the first four months of this year. That represented a 42.5% rise on a YOY basis. Net Imports for the year 2007 were 31300 tonnes. In April, Chinese net imports were 10320 tonnes with exports remaining very low at 456 tonnes. This marked the fifth consecutive month when exports kept under 500 tonne level. It is clear that Chinese buyers have been capitalizing on relatively low LME prices to do a little bit of stock rebuilding.

Another renowned agency, The World Bureau of Metal Statistics (WBMS) said it calculated the global refined nickel market which showed a production-consumption deficit of 9300 tonnes in the first quarter of the year 2008. The report estimated that global demand fell by 12 % year-on-year but that refined production also fell by 8 % over the same period. It includes in its figures production of nickel pig iron in China, but noted that the quantity of this material produced in the last few months has fallen due to lower availability of imported feed materials.

Outlook:
Nickel prices are expected to remain firm in days to come, although slight hiccups can take the prices near to its lows but strong consumption patterns from the user industry will ensure that the demand supply gap is maintained. MCX Nickel futures for June expiry is expected to find supports at 937 and 917 levels, with targets of 1100 in medium term. MCX June month has assured some positive beginning in Nickel, with prices registering a growth of 5.1 % by 10th June 2008. But this rise has been due to short covering by market participants, in coming days one can see some fresh longs emerging in the near month contract. LME Inventories downfall will also ensure that prices keep rolling higher. Consumption of Nickel in China is growing at a hefty pace. China has been the net importer of Nickel so far and healthy demand is likely to continue in remaining quarters as well.

Changing Ends- USD/INR

RBI kept silent in the begining of the month and witnessed the downtrend which was not reported in Rupee market since last one year. Rupee touched a low of 43.15 on 22nd May 2008 and recovered afterwards on the back of RBI’s intervention. However the domestic currency kept the bearish undertone throughout the month. Numerous factors were responsible for the declination of Rupee, such as dismal IIP numbers, Rise in Crude Oil prices, Lack of Inflows by FIIs. But rise in Crude Oil prices was the strongest of them all. The prices of Crude kept piping their new all time highs throughout the month and in turn compelled the Crude Oil companies to purchase dollars against the domestic currency.


India imports more than 70% of its Crude requirements therefore the sharp correction was unwelcomed by the importers. FII kept their backs on Indian equity markets on the worries of rising Inflation and overrun fundamentals in most of the companies, this created dearth of liquidity in the markets and in turn pressurized the Rupee. To make sublime ridiculous came in the IIP data, the General Index stood at 297.8, which was 3.0% higher as compared to the level in the month of March 2007, but worst in last 6 years.

Rupee vs Dollar:
It is surprising to see how the Dollar movement can contradict against various currencies. Since last one year the Dollar has lost against the Rupee and Euro on the aspect of sub prime crisis and Inflationary concerns in front of US economy and Federal Reserve. Keeping these factors constant, Euro maintained its appreciation against the Dollar. On the other side, elements like slow IIP growth and galloping Crude Oil lead Rupee to decline against the Dollar.

The Indices of Industrial Production (IIP) for the Mining, Manufacturing and Electricity sectors for the month of March 2008 witnessed growth rates of 3.8%, 2.9% and 3.7% as compared to March 2007, dismal data continued to degrade the domestic currency. This along with strong demand from Oil companies for Dollar also added pressure on Rupee.

Demand of Dollar also kept coming from Non Deliverable Forward Markets. Non-deliverable forward (NDF) markets trade mainly in six Asian currencies. These offshore markets form an important part of the global and Asian foreign exchange markets, equilibrating market demand and supply in the presence of capital controls. The NDF market offers an alternative hedging tool for foreign investors with local currency exposure or a speculative instrument for them to take positions offshore in the local currency.

Rupee started the month at 40.46 per Dollar on 1st May 2008 and ended the month at 42.59 per Dollar registering a fall of 6.65 % in a month. Rupee passed the comfort zone of RBI 43 per Dollar, touching a one year low of 43.15 on 22nd May 2008. The currency saw a high of 40.55 on 5th May 2008 against the Dollar.

Eyeing the last month, RBI made a decision to hike CRR by 50 basis points to 8% during the month of April. The measure proved to be insufficient to tame the rising Inflation (WPI) which was 8.1% for the week ending 17th May 2008. RBI through this measure sucked Rs 18500 crores from the system, however the burgeoning demand for Dollar on the course of rising current account deficit ensured that the affect of rise in CRR was nullified.

Call rates were hovering around 8 % mark as banks tried to adjust their liquidity by borrowing funds from their peers. On the verge of month ending, state run banks stepped up to sell Dollars heavily against the Rupee on behalf of the Central Bank and this lead Rupee to trim some of the losses. The market estimated that central bank sold dollars worth around $ 1 billion in a single day (27th May) to help Rupee stability, Foreign Banks bought Dollar worth $ 500 Million on the very same day. As per RBI monthly bulletin, data for March 2008 showed that the RBI was net purchaser of Dollar to the tune of $ 2809 million as against $ 2307 million on March 2007, marking a rise of 22% on a YOY basis.

On the other hand, Foreign Investment data showed a very disconfirming approach by Foreign Institutional Investors (FIIs). Total outflows were $ 8991 million in February while in March the outflows were $ 1643 million. This was against the inflow of $ 2385 million in February 2007 and a outflow $ 2433 million in March 2007. These outflows have reflected themselves on the domestic indexes, The Nifty and Sensex.

On month ending, Indian Rupee rose sharply against the U.S. dollar on 30th May, on expectations that capital inflows to the country will increase after the government allowed local companies to borrow more overseas. The Indian government on 29th May 2008, allowed local infrastructure companies to borrow up to $100 million overseas, while other companies were allowed to borrow up to $50 million overseas for local expenditure. The previous limit for overseas borrowing was $20 million for all local companies.The government also raised the foreign investment limit in government securities to $5 billion from $3.2 billion, and the limit of such investments in corporate bonds to $3 billion from the previous $1.5 billion.

Rupee Vs Other Major Currencies:
Depreciation of Rupee was not only against the Dollar but other currencies too. EURO appreciated sharply by 7.02 % in May against Rupee ending at 84.16. he same story followed in Yen and Pound. Against Pound the Rupee was down by 7.02 % while Yen appreciated by 7.26%, ending at 84.16 and 40.42 respectively. Indian Rupee remained as the second worst performer among the Asian Currencies after Korean Won.

Widening Trade Deficit Will Pressurize Rupee Further:
Ministry of Commerce, Foreign Trade Data, insures the fact that the weakness in Rupee is not for short term and the curve looks inclined towards greenback augmentation in days to come. India’s imports during March, 2008 were valued at US $ 23174.94 million representing an increase of 35% over the level of imports valued at US $ 17136.46 million in March, 2007. India’s exports during March, 2008 were valued at US $ 16282.79 million which was 26.59 % higher than the preceding year. The important thing to note in the imports figure is that, Crude Oil imports shooted up by 77% on a YOY basis. Oil imports during March, 2008 were valued at US $ 8633.14 million as against US $ 4888.47 million in the corresponding period last year.


The trade deficit for April- March, 2008 was estimated at US $ 80398.24 million which was higher than the deficit at US $ 59321.18 million during April- March, 2007, a rise of 36%. With calls coming by analysts of Crude Oil touching $150 per barrel by the year end, the problem of Trade Deficit will mount further making Import Bills to pile up and inturn throwing Rupee near to bearish clutches.

Outlook:
Considering the scenario which Crude has built on Trade Deficit front along with lack of interest shown by FIIs in the Equity markets arena, liquidity is bound to remain tight in days to come. Problem with RBI is that the Inflation has passed the comfort zone by quite a margin now and this calls for soaking up of liquidity from the system, considering this the road of liquidity becomes all the more bumpy.


Meanwhile, RBI will be cautious of Rupee’s sharp declination against the Dollar, however the Central Banker will be eyeing on export competitiveness due to which we might see some depreciation in Rupee without any interference, as it did at the start of the month. Macro economic fundamentals of the country are also suggesting bearish undertone in domestic currency. Exporters are expected to cover their positions in FOREX markets if the movement of Rupee witnesses some trend reversal. This will be providing some support to the Dollar. Going forward Dollar is expected to trade in the range of 42.32 and 43.20, if it breaks the upper range then Rupee might test 43.50 in days to come.