From the all time highs of around $US54,000 a tonne two months ago, nickel has undergone a significant correction, with prices down 25 per cent since early this month.
The fall, which came after a sharp drop in May, then a rally, started from around June 6.
The price went from just over $US48, 000 a tonne, to under $US37,000 a tonne, before it steadied and edged back over $37,000. It finished at $US37,705 for cash metal on Monday.
The slump was a long overdue reaction to an unsustainable situation:too high in the cases of prices and too low for stocks which were down to less than two days consumption.
The high nickel price was making life hell for stainless steel producers around the world and it's no surprise demand has been easing because buyers simply saw no value in continuing to buy metal at absurdly high prices.
As well, trading regulations on the London Metal Exchange seemingly helped speculators and not the trade.
So something snapped: the LME trading rules were altered, reducing the flexibility of traders, and Asian stainless steel producers followed US and some European producers in curtailing output, especially in the important Chinese market.
At the same time more and more producers reduced the amount of nickel they were using by switching to lower grade nickel material, or dropping the metal completely.
LME prices are the most important indicators in the world for the metal: demand in 2006 was put around 1.2 million tonnes.
The benchmark three-month forward contract has lost over 25 per cent and cash prices are down around 30 per cent since their peaks in May.
After the brief relief rally in early June, the price plunge resumed because of those changes in LME lending rules and the possibility of stainless steel production cuts across Asia.
These cuts were being threatened because too much stainless steel had been produced by producers trying to take advantage of the very high prices.
At the same time buyers started becoming resistant to doing deals for metal at these levels, producing a rising overhang of surplus material. Something had to give, and it did in China a week ago.
The lending rules, though largely technical, have helped limit the flexibility of speculators and other non-trade investors.
They have amplified the unease caused by the rising surplus and threat to stainless steel output.
There were production cuts among American producers at the end of last year, thanks mostly to the slowdown in the US new housing market, which also hit copper.
While metal prices rebounded from early January onwards as Chinese buyers chased supplies to rebuild stocks (especially of copper), demand continued to taper in America.
It has taken several months, but European stainless steel makers have started trimming output at the margin, with only one or two revealing significant cuts.
It seems no one wants to be caught short if there's an upturn in demand.
But last week Chinese producers collectively revealed cuts of 20 per cent to prevent the local market from experiencing a sharp fall in prices.
Chinese producers have started cutting export prices to push more material into other markets, thus increasing the oversupply there.
The Chinese domestic market seems, from all reports, to be labouring under a stainless steel mountain. Coil prices have fallen and look like continuing south for a while until demand and supply return to some sort of rough balance.
But there's another situation emerging in stainless steel and that's the move to substitute higher grade nickel for lower grade material, such as nickel pig iron.
Some mills in China, Europe, Japan and South Korea have been reported in the trade press as stepping up moves to expand their output of so-called ferritic material (without nickel) as opposed to austenitic stainless (with nickel).
While this is an immediate reaction to the very high prices, it is not the answer from the stainless steel industry's point of view.
High grade stainless steel is still needed by a wide range of users who just cannot, for technical and other reasons, use the lower grade or nickel free metals.
(The stainless steel industry accounts for 65 per cent of nickel consumption a year).
The shortage of nickel in refined or semi-refined stocks has also forced some producers (especially in Asia) to search out lower grade inputs.
Low grade nickel pig iron seems to have been the answer in China and it is being used to produce more of the stainless steel containing lower amounts of nickel.
Much of this material is coming from nickel mines in and around the Pacific (such as New Calendonia) and some producers worry that it could push the nickel market into oversupply in the next six months, which would be a significant turnaround from the shortages we have seen for the past 12 months.
But analysts expect prices to steady around current levels for high grade refined metal.
Stocks at the LME are now just over 9,000 tonnes, which still isn't enough. But it's better than the situation was six weeks to two months ago.
