Demand will continue to outstrip supply over the next two years, due to "ongoing strikes at Vale Inco's operations, unacceptable nickel laterite and a 'pick-up' in stainless steel prodution," said John Redstone and John Hughes in a note to clients.

The analyst said the Voisey's Bay and Sudbury operations of Vale Inco, which combined produces 6% of the world's nickel, are firmly on strike and won't resume before the second quarter of 2010.

Supply is also hindered by poor quality nickel laterite ore that is imported to China for use in nickel pig iron, a crude nickel-bearing product used primarily by stainless-steel mills.

"According to the CRU, much of the material imported in 2009 had an unsuitable nickel/iron composition," the analysts said. "CRU estimates that of the 9.3 thousand tonnes of ore currently stockpiled at Chinese ports, roughly 80% (7.7 thousand tonnes) is unacceptable."

Meanwhile, sentiment has improved in the stainless steel sector and Mr. Redstone and Mr. Hughes expect prices to increase 8% in 2010 and 10% in 2011.

They like Sherritt International Corp., FNX Mining Co. Inc., Asian Mineral Resources Ltd. as their preferred nickel plays.

David Pett