Slow supply growth in the nickel market will keep the market tight until 2010, with average 2007 prices forecast to jump 34% on year and project delays remaining a key swing factor for the market, Macquarie Commodities Analyst Jim Lennon said Monday.

Already the strongest performer on the London Metal Exchange in 2006, nickel cash prices will again rise sharply to average $32,518 a metric ton during 2007, up from an average $24,271/ton last year, Lennon told delegates at the Informa Australia nickel conference in New Caledonia.

The nickel-rich French territory in the South Pacific is home to key development projects Goro Nickel, owned by Companhia Vale do Rio Doce (RIO) and Xstrata Plc's (XTA.LN) Koniambo project. Nickel is mainly used to produce stainless steel.

Delays at Goro and BHP Billiton Ltd.'s (BHP) Ravensthorpe project in Australia have been key drivers in nickel's meteoric price rise.

Following a large deficit of 51,000 tons in 2006, the market will move to a small surplus of 7,000 tons this year, but stronger demand growth of 7.4% during 2008 will absorb growth of 7.3% in output, keeping the market tight, Lennon said.

Consumption growth will slow to 2.9% in 2007, down from 11.9% last year but is expected to rebound again to 7.4% in 2008.

While nickel's outlook points to "higher prices for a lot longer," Chinese production of nickel containing pig iron represented a "wild card" in nickel's supply and demand fundamentals, Lennon said.

Innovative nickel production from very low grade ore mainly from the Philippines added around 30,000 tons to the global balance last year and is likely to rise to 50,000-60,000 tons in 2007, analysts say.

A slowdown in stainless steel growth could also offer some short-term relief for the market, Lennon said, but he warned that Chinese demand might be "even stronger than we assume – as it always is."

Chinese stainless steel production totaled 5.23 million tons in 2006, up 59.2% on year and forecast to grow another 40.7% this year.

But there might be signs of slowing stainless steel demand growth, such as high inventories in the U.S. and southern Europe and a rise in Chinese stainless exports, with global indicators pointing to growth of 2.2% this year, following a sharp rebound of 15.9% in 2006.

"The 30% plus rise in stainless production in the second half of 2006 cannot reflect underlying real consumption, even after allowing for restocking," Lennon said.

But demand growth will also accelerate to an average of 5.5% between 2006-2011, on the back of urbanization and building of infrastructure in India, China and other developed countries, and possibly Africa "unleashing huge pent-up demand," Lennon said.

High prices will encourage scrap use and use of lower-quality stainless steels with a lower nickel content.