There has been considerable confusion as to why nickel prices took so long to drop to this level after inventories climbed so high. When nickel prices soared above $20/lb, every pig iron furnace was roaring at full blast and this certainly contributed to a large amount of supply flooding in to LME warehouses and drove down nickel prices.

With nickel threatening to go below $10/lb, pig iron production will significantly decrease. I have heard various reports citing the cost of production from these furnaces in China to be between $8 and $10 per pound. With nickel at $10, this makes pig iron production basically unprofitable and these furnaces will be switching to other material. Hopefully this will have an effect on inventories in coming months and find some supply/demand equilibrium with nickel prices in the $12 range.