Nickel Extends Drop to Steepest in 19 Months as Supply Expands

LONDON, May 5 -- Nickel slumped the most in 19 months on the London Metal Exchange to the lowest price in almost 10 weeks on expectations that supplies expanding at the fastest pace in a decade will overwhelm demand.

The metal for delivery in three months dropped as much as $3,949, or 16 percent, to $20,701 a metric ton, the lowest intraday price since Feb. 26. The slide was the biggest since October 2008. The contract was down 9 percent at $22,425 a ton at 5:05 p.m. local time, paring this year's gain to 18 percent, still the biggest among the main industrial metals traded on the LME.

Global production will jump 6.8 percent, the most since 2000, according to Bank of America Merrill Lynch. Vale SA's $4.3 billion Goro mine in New Caledonia is scheduled to start this year. China, the world's biggest consumer, more than tripled first-quarter production of cheaper nickel pig iron, according to Shanghai Metals Market.

"Nickel has been exaggerated on the upside," said Christoph Eibl, a co-founder of Zug, Switzerland-based Tiberius Group, which manages more than $2 billion. "The current correction has been really overdue. Nickel has been pushed so hard because it had been pushed up by investors."

The metal, mostly used to make stainless steel, will average $21,250 a ton in the third quarter, according to the median estimate of 17 analysts surveyed by Bloomberg News. The three-month contract advanced as much as 47 percent this year as world stainless-steel output jumped 55 percent in the first quarter.

Fewer Contracts

Nickel's open interest, or outstanding futures contracts, declined 5.8 percent from this year's peak to 135,685 lots as of April 30, according to LME data. Each contract represents 6 tons of the corrosion-resistant metal. Together, lower open interest and falling prices signal that investors and traders liquidated bets on higher prices.

"The correction was not unexpected," said David Wilson, director of metals research at Societe Generale SA. While lower prices may "be seen as a buying opportunity by physical consumers," he predicted "more downside before that occurs" in an e-mail today.

Prices also declined as Vale, the world's fourth-largest producer, resumed talks with striking workers in Canada through a third-party mediator. The walkout at Sudbury, Ontario, started in July.

The labor action contributed to an 85,000-ton drop in the company's nickel output last year, London-based researcher CRU estimated in March. That's equal to about 6.5 percent of global output of 1.32 million tons in 2009.

Nickel's 14-day relative strength index, a measure of how rapidly prices have advanced or declined, was at 33.63. Some traders and analysts who study technical charts view readings below 30 as signals of a potential rebound.