London (Platts)--19Nov2012/908 am EST/1408 GMT

The global nickel market is basically misunderstood with consumer restocking likely to lift prices in the first quarter of 2013, Citigroup said in its 2013 commodities outlook Monday.

The bank said nickel prices had suffered this year due to a "fundamental" misunderstanding that suggests a significant surplus of new production coming on stream.

But it said this forecast surplus is unlikely to appear in the near-term.

"This tidal wave of supply has actually been due to hit the nickel market every year for the last five years, but in reality is yet to materialize," the bank said.

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The bank said new nickel pig iron capacity from RKEF (Rotary Kiln/ Electric Furnace) producers in China is questionable due to supply disruptions of ore from Indonesia and because Filipino ore is unusable due its typical low nickel content.

"With higher grade ore stocks already heavily drawn down, and no pick up in Indonesia ore exports likely, NPI production is likely to stagnate at 2012 volumes," Citigroup said.

The bank added that new nickel supply from HPAL projects (High Pressured Acid Leaching) is also unlikely to materialize due to continued disruptions to production schedules.

"These projects have failed to meet production expectations, and the HPAL projects in particular are likely to continue to do so," it said.

On the demand side, Citigroup said stainless steel consumers have spent much of 2012 destocking nickel as prices have fallen.

Three-months nickel on the LMEselect fell from a year high of $22,150/mt in February 2012 to a year low of $15,236/mt in August 2012.

The bank said stainless steel inventories in Europe are currently at historic lows and that a modest demand improvement is expected in 2013 as consumers look to restock.

Meanwhile, demand in China is expected to remain strong as the domestic consumer market develops, while the US will maintain high melt rates on the back of strong demand from the transport and construction sectors.

"Overall nickel demand globally is expected to grow by close to 5% in 2013, rising to 1.78 million mt, pushed largely by better stainless melt rates in the US and China," Citigroup said.

The bank is forecasting a technical short covering rally in early 2013 that is likely to spark consumer restocking with prices pushing up towards $21,000/mt during the first quarter.

Three-months nickel was trading at $16,138/mt on LMEselect at 1257 GMT Monday.

--Greg Smart, greg_smart@platts.com
--Edited by Jeremy Lovell, jeremy_lovell@platts.com

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