The whipping post

Last night I went out with an old friend, who also happens to be one of the world’s leading authorities on stainless steel and nickel.

And what she was saying confirmed something I suspected was true across the whole commodity complex; the destocking has already happened – it happened last year.

Back in the day when I was a commodity analyst with CRU, the consultancy, I developed weighted industrial production indices for the metals – Alwip, Cuwip, Steelwip, and so on. They weighted an index according to how much of the demand for each metal came for each industrial subsector.

The advantage of these indices was that you could see immediately what was happening to stockbuilding. If aluminium demand was running ahead of the Alwip – it was a clear sign that industrialists were building inventories of aluminium and its products. What was also clear was that stockbuilding tended to run fastest in the first six months of an upturn in weighted industrial production.

What happened last year was the opposite – as industrial production slowed from mid year, and as the ISM fell from over 60 to under 50, we saw a major destocking phase. For stainless steel this meant that demand growth for the year came in at a paltry 1%, compared to the normal trend of 5% or so. No wonder nickel got whacked in H207.

Now most people out there are assuming that 2008 will be a poor year for the metals demand - as the assumed US recession has knock-on effects around the world. Most professional forecasters have another sub-trend year pencilled in for stainless and nickel. But my friend doesn’t – she reckons stainless demand is going to grow by an above trend 8% this year, as restocking kicks in. And I think she’s dead right – with the ISM due a strong rebound going through the third quarter, as the US tax breaks kick-in, I think we see a surge in demand across the metals complex.

A second key issue in nickel is the Chinese blast furnace production – a relatively new technique using low grade nickel/iron ores. This added a meaningful chunk to nickel supply from left field last year.

But this supply might get disrupted this year – due to the electricity shortages, and an environmental crackdown by the authorities ahead of the Olympics.

I’ve bought some nickel for the fund.