Nickel NOLD ON TO YOUR SEATS

Nickel prices in this period, after adjusting for inflation, reached their lowest levels in the post-war period, which started to induce increased nickel consumption. During this period, effective capacity of the western nickel industry declined from nearly 1,535 million lb in 1982 to about 1,382 million lb in 1988, as production was rationalized. At the same time, capacity utilization increased to 90% from 58%. Much of this reduction in capacity was caused by mining higher- grade ore and closing higher-cost production units. Using higher-grade ore reduces the need for increased mining and smelting capacity. As a result, a number of higher cost mines and smelting furnaces were either closed or placed on stand by.

By 1987, major cost savings programs available to most nickel producers had been initiated and the potential for significant future cost savings had shrunk. In 1989, some low cost producers experienced slight rises in production costs, the first in almost eight years. A portion of the cost savings that had been experienced were in the form of deferred expenditures that could be put off no longer. In addition, workers needed wage increases. New labor contracts in Canada included labor bonuses tied to nickel prices.

It is important to observe that the surge of western world nickel demand, which started in 1984, had very little effect on nickel prices from 1984 to late 1988, because of the large overhang of London Metal Exchange and producers’ inventories, as well as significant increases in communist block exports of nickel. However, in late 1988, market demand finally caught up with supply and nickel prices skyrocketed to more than $8 per lb in January and February, 1989. By this time, western world nickel demand had stopped expanding and this demand has remained in 1988 and 1989 at about the same level of 1,450 million lb.

A lean industry, in which operating units are running near capacity, such as the nickel industry in 1988, cannot easily restart closed operations or ope n new production facilities unless there is a major price escalation, as happened in 1989. It is surprising to note how many nickel projects are being rushed into production in 1989. Our count shows that firm commitments for expansions and startups of new mining capacity to be installed by the end of 1990 add up to nine projects, with total capacity of about 147 million lb. In this count are not included the potential rehabilitation of the Nonoc mine in the Philippines and an increase in Cuban production, which could amount to an additional 70 million lb of supply.

New capacity, rehabilitations or expansions now being planned or implemented by numerous nickel producers will require, on average, a return on invested capital of about $1 per lb to justify the expenditure. Since the average nickel producer now has a net production cost of about $2 per lb, a nickel price of $3 per lb will be necessary to show break-even costs on these investments. Most of these projects include only mine development costs and not costs of building or expanding smelters and refineries. Therefore, if current high nickel prices prevail, the total western world nickel supply could well exceed 1,600 million lb by 1991.

This supply could further increase, if one considers the current trend of reducing armament production in the Soviet Union. Recent Soviet legislation has extended economic independence and autonomy to various regions of the ussr, including the nickel-producing regions. Local governments could be tempted in the future to barter their nickel production for foreign goods. Cash-rich Producers

On the other hand, looking at the nickel demand graph which illustrates the cyclic nature of nickel consumption, even a mild recession could drop the western world nickel demand by, say, 150 million lb to about 1,300 million lb in one or two years. We do not expect that the downside market action will be as quick and dramatic as in the recent past. All producers have paid off their debts and are relatively cash-rich. They have low inventories and can also afford to reduce production rates. Some have run their furnaces and equipment to the limit to cash in on current high nickel prices and will initiate furnace relining and repairs as soon as demand and prices decline.

The hardship may come later, if the recession is extended over several years, and marginal suppliers will have to be eventually forced out of production. One can be sure that the longer the present high prices prevail the more marginal nickel production capacity will be rehabilitated and actually brought into production the more severe will be the roller coaster ride. Messrs. Torries and Martens are principles in NICKDATA INC., a Toronto- based company. This year, it will publish its seventh annual comprehensive nickel industry cost study, reporting on the costs and operating activities of every major nickel producer, mine/mill, smelter and refinery in the western world.

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