Nickel – where to from here?

by Andrew McCrea

Nickel has been one of the hardest hit of all commodities in the current downturn with the falling nickel price impacting producers as well as nickel explorers. The prospects for nickel companies and current historically low share prices could be either a good opportunity for the long term investor, or best watched from the sidelines until clarity prevails.

Nickel consumption

Nickel consumption can be summarized as: nickel steels (60%), nickel-copper alloys and nickel silver (14%), malleable nickel, nickel clad, Inconel and other superalloyrs(9%), plating (6%), nickel cast irons (3%), heat and electric resistance alloys, such as nichrome(3%), nickel brasses and bronzes.

China is now the largest user of stainless steel in the world. Not only is it the largest; it also uses more stainless steel than the next two largest users: the United States and Japan, combined.
Consumption was 1.4 million tonnes last year and forecast to be 1.4 million this year - an implied surplus of 97,000 tonnes and 15,000 tonnes respectively.

Nickel Supply

The world's top 5 producers of nickel are as estimated as follows:

- Norilsk Nickel Russia (OTC: NILSY) 18%
- Companhia Vale do Rio Does (CVRD) (NYSE:RIO) Canada, UK, Japan, Indonesia 17%
- BHP Billiton (ASX: BHP, LSE:BLT) Australia, Colombia 11%
- Xstrata Plc (LSE:XTA) Canada, Dominican Republic 9%
- Jinchuan China 8%
- Rest of World 37%

Market analysts have calculated that global finished nickel production was 1.434 million tonnes last year and forecast nickel production to fall to 1.415 million tonnes in 2008.

Cuts by nickel producers are estimated to trim output by 35,000 tonnes this year and 11,000 tons next year. The impact of the cuts by CVRD Vale (later section) hasn't been quantified, but will have more of an impact on 2009 global production.

Approximately 87,000 tons of nickel is recovered annually by recycling stainless steel and other nickel-iron alloys. This represents about 39% of the nickel used each year.

It is estimated that there is about 140 million tons of nickel available in identified deposits. Eighty-four million tons, or 60 percent of the total available nickel is in laterite deposits. A deposit in which rain and surface water leached nickel-rich rock and concentrated the nickel at or near the surface of the Earth is a laterite deposit. Nickel sulfide deposits contain the remaining forty percent (56 million tons).

LME Inventories

LME nickel stocks are currently near their highest level since May 1999 and stand at over 55,470 tonnes - suggesting a large surplus.

Nickel Substitutes

The record nickel price triggered substitution by stainless steel mills to lower grade and cheaper alternatives.

There are a number of materials that can be used in place of nickel, but generally, these substitutes are more expensive than nickel and/or less effective. Aluminum, plastics or coated steel could be used in place of stainless steel in some situations. Titanium can be used in place of nickel to make some superalloys.

The fastest growing type of stainless are those grades without the nickel content, or with less nickel in the composition.

Many stainless steel producers attempted to offset relatively high nickel prices (in 2007) by reducing the nickel content of the steel they produce through substitution with other metals, such as chromium.

Current nickel market - characteristics
Massive growth in Chinese consumption of nickel occurred in 2007, as production of stainless steel increased significantly. In this period, the world’s economy also witnessed strong demand growth for stainless steel from North America, Europe and Japan.

Hedge funds and large institutional traders played a significant role in triggering a short squeeze on the futures markets.

The nickel price was as high as $US50,000 per tonne. Today, three month nickel trades about $US9500 per tonne. Nickel is down more than 80 percent since a record of $US51,800 per tonne in May 2007. Nickel prices on the London Metal Exchange have fallen 82% from their record high hit in May 2007. In October alone, nickel prices have fallen as much as 44%.

Stainless steel producers, including China, Japan, and South Korea, started making investments in new technologies. Some steel producers used nickel free stainless steel, known as the 400 series, further driving down demand for nickel.

Stainless markets have also weakened, in turn dragging down demand for nickel with it.

Trends in the nickel market

· Faced with slumping demand from steel mills and a falling nickel price and demand producers will slash output further and also slow new capacity coming on-stream, particularly for marginal mines.

· Current nickel prices are below break-even level for some miners. Average production costs are estimated at $10,500-$11,000 per tonne, and around $15,000 for the highest cost producers.

· It is estimated that some 40 percent of the nickel industry maybe losing money. Ongoing closures can be expected

· On the plus side for nickel, there are an estimated three billion people in Asia who want to claw their way up the consumption ladder and the global turmoil will not likely change the long term trend.

· It is likely that another downturn in exploration in underway which will mean a repeat of 2002 of under-investment followed by another upsurge and resources boom

· Any disruption in major nickel producing mines or delays in current nickel projects could create a short-term situation where demand would outpace supply. Should this happen, we may see spikes in the nickel price rise. As traders and speculators in commodities have become major players in influencing short-term prices.

· The junior end of the market will struggle over the next year, with little capital available to conduct exploration

· Project development funding will be difficult to come by

· Supply is likely to keep falling significantly as high-cost producers struggle to survive the current low nickel price environment

· The nickel market may follow historical trends. Demand for nickel was negatively impacted by the 1982 economic recession, the 1997 Asian crisis, and the 2001 economic recession. As a result of the above factors, nickel prices were depressed at or below the US$5/lb level for a long period prior to 2003.

· Growth in Chinese car sales has been much slower than expected this year, and sales could be flat next year, after several years of double digit growth.

· Government moves to stimulate the local property market, which has suffered its own downturn in recent months, are expected to take at least six months to feed through into increased steel demand from construction, industry analysts said.

Current news
Although priced in dollars, which has recently risen against currencies such as the Australian dollar, nickel producers in those countries are unlikely to be shielded from the downturn forever. Similarly, Australian nickel producers have been shielded somewhat from the nickel price fall due to the fall in the Australian dollar.

Much of the selling in the nickel market was not due to fundamentals, there had been hedge funds and other hot money rushing to get out of the market. Global consumption of nickel dropped for a fifth straight month in August to the lowest since September 2007.

Nickel is currently trading around $US9,500 per tonne.

Nickel production shut-downs

- Norilsk Nickel (OTC:NILSY) has halted operations at its Cawse mine and ore processing plant in Western Australia, blaming rising costs. The decision doesn't affect Norilsk's other Australian nickel operations at Black Swan, Lake Johnston and Waterloo, which continue to perform well, the Moscow-based company said. Norilsk said it will revise its investment programme for next year due to a decline in metals prices.

- Vale (CVRD of Brazil) (NYSE:RIO) revealed it was reviewing production and would cut output and maybe delay new projects. Vale says it has cut production at a nickel plant in China by 65% and is reducing output in Indonesia by 20%. The company's Goro (New Caledonia) and Onca Puma (Brazil) nickel mines will start up late. The company said Onca Puma nickel mine in Brazil was scheduled to start in the first quarter of next year and Goro on the island of New Caledonia was to start this month on minimal production.

- BHP Billiton (ASX:BHP/LSE:BLT) will produce less this nickel year because of the revamp at its nickel smelter in WA. BHP shut down its 100,000 tonne per year Kalgoorlie smelter for four months of repairs during the summer.

- Xstrata Plc (LSE:XTA) temporarily suspended operations at its Falconbridge dominicana mine. Xstrata's $US3.8 billion Koniambo nickel project is in limbo as funding pledges have been partially withdrawn.

- First Nickel (TSX:FNI)said it had suspended production at its Lockerby Mine in nickel-rich Sudbury, Ontario, due to low nickel prices.

- Jinchuan Group, China's largest nickel producer, said it has decided to reduce its full-year nickel output target to 100,000 tons, down 16.7% from the previous target, in order to help support market prices. In a statement published on its website, the company said the three-month nickel price quoted on the London Metal Exchange has fallen about 63 pct from the beginning of the year, while the domestic price has fallen below production costs.

- Ufaleynickel, Russia's third-largest nickel producer, said on Monday it had stopped production of the metal due to a fall in world prices and planned to let go some 400 employees. The cost of the plant's production is significantly higher than the price of the metal on the world markets. tt costs the company $US26,000 to produce a tonne of nickel, with current exchange price of only $US8,000.

The nickel bulls

The Nickel Institute’s Stephen Barnett said, "if the Chinese economy continues to grow at the 8-10 percent level, then that drives demand.” Barnett, whose institute represents about 85 percent of the nickel industry, also said the threat to prices brought on by more production coming onto the market is overplayed. The reality is that it takes three to five years to get it up to capacity usually. It will be very unlikely that you're going to get an additional 50-60,000 tonnes appearing on the market," he said.
Greener environmental policies from governments will also boost demand, Barnett added, with wind turbines, nuclear power plants and hybrid vehicles all using nickel.

"The long-term demand and strength is there," he said. "What you've got is one of those standard ups and downs - that's called market forces. In addition, as commodities are consumed, it is getting increasingly difficult to replace the depleted resources at a reasonable price and add to this increasing demand from China, India and the rest of Asia. As a result, nickel prices in three years time will be substantially higher than now.”

Other nickel bulls include Dale Rogers, managing director of Albidon Limited (ASX:ALB). “We'll look back at this time in months to come as the greatest opportunity to purchase,'' Mr Rogers said. ``Inevitably what we will see is a focus on costs and a flight to quality and low-cost producers.''

Western Areas NL (ASX:WSA) an Australian nickel producer that has reported large increase in nickel sales, said prices may recover next year. CEO Julian Hanna said, ``The price simply can't stay this low for long. It's putting pressure on all producers, including those in China.''

He said, that Chinese metal traders expected nickel to "rebound rapidly" to between $US8 and $US10 a pound from the current levels of $US4.70 a pound, and he described the slump as a "real anomaly".

Other Nickel companies (in no order):

Albidon Limited (ASX:ALB, AIM:ALD) has transitioned from exploration company to producer with its mining operation being commissioned at Munali Nickel Project in Zambia. 10,500 tpa of nickel production is planned in high quality Ni-Cu-Co-Pt-Pd concentrate. Project financing and nickel hedging completed on attractive terms. Construction completed with first concentrates produced in June 2008.
Western Areas Limited (ASX/TSX:WSA) is an Australian-based nickel sulphide explorer and producer listed on the ASX and TSX (ASX & TSX Code: WSA). The Company's core asset is the 100% owned Forrestania Nickel Project, located 400km east of Perth. The primary discovery at Forrestania, Flying Fox, is one of the highest grade nickel deposits in the world. Total Mineral Resources at Flying Fox comprise 1.5 million tonnes at an average grade of 6.1% nickel, containing approximately 105,000 tonnes of nickel.

Minara Resources Limited (ASX:MRE) Minara Resources Limited is Australia's second largest nickel producer, and one of the top ten in the world. Based in Perth, Western Australia, Minara operates the Murrin Murrin nickel and cobalt, joint venture project (60% Minara, 40% Glencore International AG) which is situated in the northern goldfields region between the towns of Leonora and Laverton. The company is one of Australia's Top 100 public companies.

Rusina Mining Limited (ASX:RML/AIM: RMLA) Rusina Mining N.L. is an active mining exploration company that is focused on the emerging Philippine mining sector. The company has achieved first full year of mining production, sales and revenues from the Philippines, led by the flagship Acoje nickel mine on Luzon Island.

Amur Minerals Corporation (AIM:AMC) Amur Minerals Corporation is an exploration and development company focused on base metal projects located in the far east of Russia. The Company has three properties in the region with its principal asset being the Kun-Manie sulphide nickel, copper project located in Amur Oblast.

Landore Resources Limited (AIM:LND) is engaged in mineral exploration and development, with the present focus of its operations being mineral exploration in Ontario, Quebec and New Brunswick, Canada Indicated resource 4.49 million tonnes @ 0.453% Nickel equivalent (NiEQ), plus Inferred resource 0.47 million tonnes @ 0.437% NiEQ. for a total of 22,407 tonnes NiEQ..

Horizonte Minerals Plc (AIM:HZM) is focused on Brazil and Peru, has recently announced some highly encouraging drilling news concerning its flagship Lontra nickel laterite project on the eastern margin of the Carajas mineral province of northern Brazil.

Mirabela Nickel Limited (ASX: MBN/TSX:MNB) Mirabela's lead project under development is Santa Rita - a disseminated nickel sulphide deposit in Brazil. Production of nickel is targeted to commence in 2009. This is the largest nickel sulphide resource in South America and the largest greenfield nickel sulphide discovery in the world in the last 10 years. The Company completed a positive bankable feasibility study in June 2007 and recently obtained US$183m in equity financing to develop the project. Throughput is planned to increase to 4.6 million tpa to produce 18,500 tpa (41 million lb) of nickel in concentrate.

Poseidon Nickel Limited (ASX:POS) Poseidon is a mineral exploration company whose main activities are towards the exploration and development of nickel mineralisation in Mt Windarra 260km NNE of Kalgoorlie, Western Australia. Windarra consists of two leases, and one main lease covering a total area of 70 square kilometres. Poseidon also has two exploration interests in gold mineralisation in Ghana, West Africa, both projects sitting in the Ashanti Gold Belt.

Pioneer Nickel Limited (ASX:PNI) focus remains on the Golden Ridge Nickel Project, while advancing the Mt Chester Manganese, Lignum Dam Gold and the Mt Thirsty Nickel South Cobalt-Nickel Projects in Western Australia.