LONDON, Aug. 18 -- Nickel may drop as much as 23 percent by the end of this year as demand weakens for stainless steel, the main source of consumption for the metal, according to UBS AG.

Immediate-delivery nickel may fall as low as $16,535 a metric ton, analyst Tom Price said by phone from Sydney yesterday. Spot metal closed yesterday at $21,479 on the London Metal Exchange. Prices probably will breach February's 2010 low of $17,030 before rebounding next year, according to UBS.

"The third quarter is the weakest quarter for the nickel trade," Price said. Demand will wane as "producers take some of the stainless-steel mills off line for maintenance in China, in Europe and in the U.S.," he said.

Growth in world nickel usage will slow to 8.4 percent in the current quarter, down by almost half from the prior three months, Barclays Capital said Aug. 13. Demand from China, the world's biggest consumer, will stay at 377,000 tons this year after a 32 percent jump in 2009, according to Price.

UBS is the most accurate forecaster so far of spot nickel's average third-quarter price among 17 banks surveyed by Bloomberg News in May. The metal has averaged $20,279 a ton, compared with the $20,282 predicted by the Zurich-based bank. The survey estimated that spot nickel would average $21,250 for the quarter.

Shift to Deficit

Prices will find support as the market moves into deficit this year and the global economy recovers, according to UBS. Demand will outpace supply by 32,000 tons this year after a 47,000-ton surplus last year, the bank estimates.

Stockpiles of nickel tracked by the LME peaked this year on Feb. 8 at 166,476 tons, the highest level since at least 1979. They have since slid 30 percent to 116,592 tons, according to daily exchange figures.

Still, "if you look further out, massive supply is coming," counteracting smaller inventories and a deficit market, Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, said by phone yesterday.

Vale SA, the fourth-biggest nickel producer in 2009, said Aug. 9 it had started producing metal at its 60,000 tons-a-year Goro mine in New Caledonia and a refinery probably would be operating by the end of the year. Vale workers at Canadian plants in Sudbury and Port Colborne in Ontario voted on July 8 to end a year-long strike.

Sudbury "has been very important to supporting prices," UBS's Price said.

Vale produces about 150,000 tons of nickel a year in Canada, according to Barclays Capital. Global supply of the metal will increase 7.1 percent this year to 1.4 million tons after a 3.5 percent drop last year, the bank estimates.