DJ Nickel Pig Iron Output Shutdowns To Support LME Price - Macq

SYDNEY, Jun 01, 2008 (Dow Jones Commodities News via Comtex) -- Cuts in stainless steel production and the sharp fall in nickel prices have forced the closure of significant parts of China's nickel pig iron production, key swing producers for the stainless steel ingredient, and that should support nickel prices around current levels, Macquarie Monday said in a report.

Nickel containing pig iron output in China gathered momentum in 2006 and especially last year when nickel prices shot up to a record $51,800 a metric ton. London Metal Exchange prices have since moderated to trade around $22,000/ton, still high by historical standards.

Nickel pig iron output accounted for around 100,000 tons of supply last year, analysts estimate, but strong increases in raw material input costs, especially coke and thermal coal, have forced some nickel pig iron producers in China to run their operations below break-even levels.

This is especially so for those using blast instead of electric arc furnaces that have higher input costs for coke, whose market prices have more than doubled in the past nine months, Macquarie said.

Since reaching record peaks last year, LME nickel has slipped, but the fall accelerated at the start of May and prices have dropped from around $29,000/ton to the current $22,000/ton.

"As a result, we hear that more than half of the blast furnace operators in Shandong, Henan, Shaanxi and Hebei area have closed their plants, especially those that produce lower-grade products," Macquarie said.

"In the short term, there should continue to be blast furnace operators exiting the industry, and this should support (nickel) prices at current levels, which are already below the break-even levels of many producers," the bank said.

Reports of heavy stainless steel production cuts - stainless accounts for 66% of nickel use - in China in May and June and reports of a weakening in European and U.S. stainless steel market fundamentals are also weighing on nickel, but if production adjusts to lower demand levels then prices should stabilize.

"The most-critical element in deciding where nickel prices go from here is what happens to Chinese nickel production, particularly nickel pig iron production. These producers are at the top of the global cost curve and some are deeply in the red at current prices," Macquarie said.

Production costs vary wildly depending on grade and technology, ranging from under $10 a pound for some electric arc furnace producers to $12-15/lb for blast furnace producers of low-grade pig iron.

Producers of low-grade, or less than 4%, nickel pig iron have recently moved to carbon steel to improve profit margins.

To produce 8% nickel content pig iron, LME prices need to stay above $19,700/ton, or $8.90/lb. For the same metal content via electric arc furnace, the break-even cost is marginally lower at $19,300/ton, or $8.70/lb, Macquarie said.

However, for 5%-6% nickel content pig iron, the producers need the nickel price to exceed $23,000/ton, or $10.4/lb.

-By Elisabeth Behrmann, Dow Jones Newswires;

61-2-8235-2965; elisabeth.behrmann@dowjones.com

(END) Dow Jones Newswires

06-01-08 2257ET