Nickel conference seeks clarity on prices

It’s been a pretty wild ride for nickel producers. Over the last eighteen months, nickel values have been eroded by about 77.5% falling from US$24 per lb. a year ago to about US$5.40 per lb. today. That dramatic decline and speculation about where the nickel price might move in the future were the subjects of much discussion at the recent Second Americas Nickel Conference in Rio de Janeiro from Oct. 28-29.

“The ascent of nickel between 2005 and the first half of 2007 was overdone — it was too hard and too fast,” Richard Murphy, president and chief executive of Independent Nickel (INI-T, INIFF-O), declared during a presentation at the conference. “Having said that — the descent has been far overdone. Prices are well below marginal costs.”

Murphy noted that nickel must be priced at no less than US$7 per lb. to “sustain an economic reality.” But he remained confident that current delays in project development as well as slowdowns as a result of the low nickel price and financial crisis “are sewing the seeds of the next bull market.”

Ronaldo Valino of Pricewaterhouse Coopers suggested that mining companies should seize the opportunity that the economic meltdown offers them to take stock of their operations, cut internal costs and redefine projects. The exercise will bring them greater health in the long term, he argued.

“I believe the companies will be even stronger after this adjustment, with more robust operations, and will be better prepared,” Valino explained. “Asia will continue to grow, the American economy will recover further on, and mining companies can actually try to do the house-cleaning [now] to have sustainable growth later.”

Valino explained that cutting costs would be imperative going forward. According to his research, while nickel prices soared during the 2006-2007 period, operating costs in the nickel industry jumped by 49%. As a result, net profit margins for nickel producers went down from 28% in 2006 to 26% in 2007, while return on equity fell from 33% to 29%. Operating cash flow margin dropped from 32% to 30%.

Given reductions in revenues that are anticipated this year, companies are going to take a harder look at their costs, the thinking behind expansion projects, and will have to try to renegotiate with suppliers and unions in order to maintain returns to shareholders.

Nickel is likely to hover at around US$6 per lb. in 2009, Mary Ann Crichton, director of Hatch Canada, estimated during her presentation on the sector. Hatch is a global mining engineering, construction and management consultancy.

She noted that scrap recovery in Asia has increased dramatically at the same time as cost spikes have driven consumers towards substitution in stainless steel production. Stainless steel producers may boost their non-nickel or low-nickel steel by an average of at least 10% annually, she estimated.

Crichton also described how nickel in pig iron has emerged in recent years in China as a new source for China’s 200-level series of stainless steel. Now there are more than about 100 producers of nickel in pig across China, she estimated.

“They’re small and difficult to regulate and are across seven provinces in China and have access to the coke plants and this is what has been driving the substitution,” she explained. Major producers of stainless steel in China are making 300 level series stainless steel from lower grade using nickel pig as an input.”

Crichton maintained that nickel pig started off in old mini-blast furnaces, before migrating into old ferro-alloy blast furnaces and now new facilities are being built to produce nickel pig, some of which will be electric furnaces. China steel giant Baosteel is using high-quality nickel pig to blend with primary nickel to produce 300 level series stainless steel, she added.

Alan Heap, managing director of global commodities at Citi Investment Research, noted that when nickel in pig production began in China many believed it was going to be a fairly short-lived phenomenon but that it looks as if nickel in pig production “is going to be a permanent feature of the nickel market.”

The key challenge for nickel is switching from high nickel-content stainless steel alloys to low nickel-content stainless steel alloys, according to Heap. He pointed out that despite the fact that nickel prices have fallen and manganese is relatively stable, the switch to low nickel content alloys is still very much underway.

“We’re still not seeing a switch back to high nickel-content alloys,” he said. “Why? This time around stainless steel consumers have realized that provided you’re selective, their performance is perfectly satisfactory.”

A second reason is that consumers have spent the time in research and development dollars to enable them to use these lower nickel alloys more effectively, he added. They are difficult materials to handle, he explained. If they’re rolled into thin sheets they will crack, or if they are rolled into fine wire they will break. But nowadays these challenges are being overcome.

“It’s increasingly evident that the period of US$20 per lb. nickel has resulted in permanent nickel demand change,” he argued.

Heap asserted that global nickel demand growth will be negative 1.5% this year. Next year Citi is expecting a recover of 3.2% “but there are doubts on that number” and the demand side in the medium term “does not look good.”

On the supply side, declining prices have caused cutbacks and closures. In 2007, supply fell short of his forecast at the beginning of the year by about 37,000 tonnes, largely due to shortfalls from existing operations rather than delays in new projects, he said. This year the production shortfall will be greater than that, he forecast, with involuntary production losses and voluntary cuts due to weak prices.

Moreover, production cutbacks are coming more rapidly in this cyclical downturn than in previous downturns for the industry as a whole, Heap maintained.

On the bright side, this means that we won’t see the massive inventory build that we’ve seen in previous downturns and a lower inventory overhang will mean that prices will likely recover in a more timely way.

However the potential supply from new nickel projects if they go ahead could have a negative impact. “We do have a lot of new supply coming, especially from the nickel giants such as Flying Fox and Goro,” he said. “Vale did say last week that they will proceed more slowly with the ramp up of Goro due to the slowdown in prices [and] I expect those sorts of announcements will accelerate in the coming weeks.”