ANALYSIS-Restarts may bode ill for nickel, aluminium

* China nickel in pig iron output outstrips forecasts * China aluminium smelters could cut output again quickly * More supply restraint needed if demand disappoints By Michael Taylor and Karen Norton LONDON, Oct 8 (Reuters) - Miners and smelters of some industrial metals may have been too hasty restarting capacity in response to higher prices and tentative signs that the worst of the global economic crisis is behind us. The flurry of reactivations in nickel and aluminium are the most disconcerting and may leave those markets in over supply for longer than first feared. But some analysts believe Chinese aluminium smelters would respond quickly if it became clear their output was not needed. The same does not seem to hold for nickel. The sharp contraction in metals demand, particularly from the key construction and car industries, prompted a host of production cutbacks and closures from the middle of last year. But metals prices began to pick up again early this year and closures dwindled as producers saw they could make money. The list of restarts has since grown steadily. "We've had a few announcements recently that have psychologically caused people to go 'Uh-oh, things are getting turned on again'," said Alex Heath, head of base metals at RBC Capital Markets. "With the best will in the world, I don't think we're going to see a surge in consumption," he added. Aluminium has seen the most restarts to date, mainly in top producer China, and analysts estimate that almost half of the 7.0 million tonnes, or 18 percent of world production, that was shuttered has reopened. Annualised Chinese aluminium output in August was 14.4 million tonnes, just off the 14.8 million tonne peak a year earlier, due to a combination of restarts and new capacity. Higher prices have also led to an unexpectedly sharp rise in Chinese output of nickel in pig iron -- a lower grade nickel, even though offtake -- particularly from the key stainless steel industry -- remains poor. By mid-August the London Metal Exchange (LME) three-months price had reached $21,325 a tonne, almost double end-2008 levels. Over the same period aluminium prices rose almost 40 percent, while copper and lead prices more than doubled. Chinese nickel pig iron output is on course to total 100,000 tonnes this year, way above predictions of 30,000-40,000 tonnes made at the start of the year, according to Max Layton, an analyst at Macquarie Bank. "Nickel is likely to remain in over-supply next year and the one after; far longer than most metals," said Stephen Briggs, a metals analyst at RBS Global Banking & Markets. LME warehouse inventories of nickel are around their highest levels in 14-1/2 years. LME aluminium stocks have levelled off for now, albeit just below last month's all-time high of 4.629 million tonnes. Both metals also have to battle with a large amount of idled capacity waiting to come on line at the right price and reasonably full project pipelines. COPPER OF NO CONCERN The same cannot be said for copper, and the few restarts announced have been of little concern to the market. Partly because there were so few in the first place. But also because supplies of the metal, used in transport and power, have been constrained by industrial disputes, equipment problems and falling ore grades. In aluminium, some analysts argue that Chinese producers, who have fired up their smelters again, are only satisfying domestic demand and not adding to global over-supply. "They will restart if they can sell the metal and if they can make money," said Massimo Rossi, a senior analyst at industry consultants CRU Group. But if things turn sour he anticipated a swift response, matching the vigour with which they idled more than 3.5 million tonnes per year of capacity in just two months early this year. Analysts have yet to be convinced that demand for industrial metals is about to take off any time soon. "What we worry about is whether after the end to de-stocking in the next three to six months, there is underlying consumption growth," said Macquarie's Layton. "If there isn't any, you may need to see (supply) restraint." For a factbox on restarts of idled mines and plants click on: [ID:nLL34186] (Edited by Sue Thomas)