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Nickel soars, prompting metal exchange to impose trading limits

Section: Daily Dispatches

By Matthew Craze
Bloomberg News Service
Wednesday, August 16, 2006

LONDON -- Nickel prices climbed to the highest since at least 1987 as stockpiles dwindled, forcing the London Metal Exchange to impose trading restrictions for the first time in a year.

After nickel surpassed $29,000 a metric ton, twice its level at the start of this year, the LME ordered for delivery rules to be suspended because of shortage of the metal. Inventories have plunged 83 percent in the past year.

"We now have a genuine material shortage," Simon Heale, chief executive officer of the exchange, said in an e-mailed statement today, explaining the exchange's decision.

The price of nickel, a metal used to make steel rust-resistant, is four times higher than the average of the 1990s because of a surge in demand from China. The high prices have led to a seven-week, $17 billion, battle for Inco Ltd., the world's second largest producer of the metal.

Nickel for three-month delivery advanced $1,645, or 6 percent, to $29,100 a metric ton as of 7:12 p.m. in London. Earlier, the contract gained as much as 6.4 percent, the most since January 2004.

The extra cost, or premium, paid for immediate delivery of the metal compared with delivery in three months more than doubled to $3,600 a ton, the highest in at least 11 years. Nickel stored in warehouses tracked by the LME has dropped to 6,162 tons this year, equal to less than two days of global use.

The LME ordered that holders of so-called short positions, or bets that prices will fall, can borrow nickel at no more than $300 a ton each day. The exchange last intervened in metal trading in August last year after hurricane Katrina left stockpiles of zinc stranded in New Orleans, pushing the metal to an eight-year high.

"There's certainly something going on and somebody has got large short positions" in nickel, said Stephen Briggs, an analyst at Societe Generale, one of the 11 companies trading on the floor of the LME. "It's a very tight market but the physical nickel market is rarely as tight as the LME market suggests."

Posco, the world's fourth-largest steelmaker by output, said two days ago it had a short nickel position on the LME of "less than 1,000 tons." The company commented after the Wall Street Journal's Asian edition reported it made wrong-way bets involving 10,000 tons of nickel. Posco has been scrambling to cover the positions and is being forced to roll them forward at ever greater expense, the newspaper said, citing unidentified metal market sources in London. The company said rumors of such a large position were "groundless."

Nickel producer Inco has been the focus of a takeover battle since June 26, when Phelps Dodge Corp. first bid for the Toronto-based company. Teck Cominco Ltd. and Brazil's Cia. Vale do Rio Doce subsequently made proposals, pushing the offer price to C$19.4 billion ($17.4 billion). Teck today withdrew from the race after failing to sell stock to finance its offer.

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