Chinese stainless steel output is forecast to rise by 60% this year in China to 5.1mt according to an article by Interfax. Chinese consumption could rise by 16% to 6.15mt with imports reaching 2.6mt versus exports of just 600kt according to Antaike. China's stainless steel capacity has been climbing rapidly and by the end of the year could reach 12mt of which 8mt of capacity was built in 2005 and 2006. This implies overcapacity will reduce prices to stimulate further demand while putting margins under pressure at a time of rising raw material costs. China appears to be trying to slow economic growth to prevent over capacity building in various industries. However, demand is likely to continue to expand as the economy grows. GDP is expected to rise by 9.25% next year according to a domestic research institute, from 10.48% anticipated for this year, the OECD forecast 10.3% GDP growth for China through 2007.

Nickel: Nickel prices have performed strongly due to demand from the stainless steel and a lack of supply and inventory to meet it. In addition new capacity has tended to be delayed e.g. Goro (60ktpa) now expected to start production in 2008 from Q4 07. Nickel prices reached a record of US$34,100/t this week. High prices are causing substitution where possible, but this is limited. China has even been importing low grade nickel laterite ores at 1.5-2% Ni to make pig iron with 4% Ni, which can then be used to make stainless steel in an effort to reduce its exposure to the high prices. The economics of doing this reportedly work with nickel prices over US$15,000/t although we are amazed to hear of such low grade nickel ores being transported so far.

Ferrochrome: Ferrochrome prices are currently at 78c/lb. Prices have risen steadily from 68c/lb in January. Stainless steel has been the driver to this price rise, with China in particular growing its imports. Charge chrome imports were practically zero in 2001 and climbed to just under 250kt in 2005. Although new capacity is coming on stream, growing demand from China should be able to absorb it.

We continue to recommend: International Ferro Metals, Albidon, Xstrata, BHP Billiton, European Nickel, LionOre, and Consolidated Minerals as beneficiaries of the strong demand in China for stainless steel.