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LONDON (Scrap Monster): The short term volatility in the nickel market and its proportionate effect on alloy surcharges and transaction figures, continues to trouble buyers and sellers of stainless steel, according to MEPS International Stainless Steel Monthly Review.

Nickel prices are likely to remain in a fairly tight range this year. MEPS predicts an annual average LME value of $US21,500 per tonne, 5.8 percent down on the 2011.

The prospects for future nickel values are not very positive. New mining projects in Australia, Brazil, New Caledonia and Madagascar could add more than 100,000 tonnes to global nickel production in 2012. This will contribute to a surplus of supply over demand that could exceed 40,000 tonnes this year. Production may continue to outstrip consumption until 2014.

According to MEPS, the global stainless steel market is exhibiting the positive signs that are customary at this time of year. Demand on the mills is strong, boosted by inventory replenishment and buyers purchasing forward in anticipation of rising transaction prices.

Producers are able to lift basis values as their order books are full for the next couple of months. The alloy adjustment element of prices in most countries will climb, at least until March, as a result of LME nickel figures, which were on an upward trend until February 8.

Furthermore, sellers in North America and northern Europe report better than expected sales volumes. While this is certainly influenced by restocking and speculative buying, there is an air of cautious optimism in the market.

The major note of concern is the ongoing price of nickel. Stockists are, of course, worried that they will be caught with expensive material when values begin to fall. That point may not be far away. The LME nickel price has been on a downward trend for the last few weeks, which could lead to lower surcharges as soon as April.

Moreover, nickel pig iron (NPI) remains a constraint on the value of the pure metal to stainless steel producers. The low grade, Chinese-refined material can be used by the local steelmakers as a substitute for primary nickel or scrap. The cost of making NPI varies between sources but operations are viable for most producers when LME figures rise above $US20,000 per tonne. This tends to put a glass ceiling on the nickel price unless the supply/demand balance changes quickly or external factors come into play. Conversely, NPI suppliers drop out of the market as values fall below their production costs, contributing to an effective floor to the LME price of between $US17,000 and $US19,000 per tonne.

On the positive side, recently released figures show unexpectedly strong manufacturing growth in major markets such as the USA, the UK and the world's largest stainless steel consumer, China. MEPS continues to forecast global crude stainless steel output at 33.9 million tonnes in 2012, a year-on-year increase of 5.5 percent.