New nickel market to emerge: analysis — But it doesn’t look any friendlier than the present one

It just doesn’t look all that good for nickel.

Recent analyses of the nickel market, from a number of quarters, are generally pessimistic. Even accounting for bottom-of-the-market despair, which frequently colors market forecasts in bad times, there seems to be little hope going around.

And along with the widespread fear that prices will not be making a sustained upturn for the next two years, there is likely to be a marked change in the structure of the industry, one with implications not only for troubled hard-rock producers like Inco (N-T) but also for the major laterite operations.

Australian-based AME Mineral Economics is predicting that the whole industry will see a lower cost structure develop over the next two years as production comes on-stream from three pressure acid-leaching projects in Australia — Murrin Murrin, Cawse, and Bulong.

The AME commodity analysis, entitled Nickel Industry Operating Costs to 2005, notes that the new laterite leach projects have distinct advantages over the old-style roasting processes.

For example, conventional laterite production was so energy-intensive that several laterite projects were abandoned when fuel costs rose dramatically in the 1970s. And unlike conventional methods, the acid leach plants can also recover byproduct cobalt, gaining a further advantage over the roaster systems.

While production of cobalt byproduct may not be the same cash cow now that it was in recent years, even at US$8 per lb. it can provide an appreciable credit. Prices of cobalt recently resumed their dive, and cathode is now being traded around US$17 per lb., but Australia’s Centaur Mining, which is developing the Cawse project, believes credits at present prices could conceivably offset the entire cash cost of producing nickel from Cawse.

Added to that is the advantage of producing refined nickel directly. The traditional card held by hard-rock nickel producers — the ability to ship concentrates and avoid the energy-intensive roasting process that hobbled the first generation of laterite producers — is finessed as the new laterites bypass smelting costs, and incidentally leave the low-end ferronickel market to other producers.

Taken together, the three new Australian projects could be producing 61,000 tonnes of nickel in 2000 — about the same amount that is currently being held in London Metal Exchange warehouses. Other planned developments, including Inco’s Goro project in New Caledonia, could potentially produce almost a quarter of a million tonnes of nickel annually.

At the same time, hard-rock nickel producers have been cutting costs drastically. Australian heavyweight Western Mining Corp. has announced that three of its mines in the Kambalda camp of Western Australia will close shortly. Inco’s much-publicized announcement that it would shut down four mines in its Ontario Division is less meaningful, since three were scheduled to close in any event. Still, Inco reported its unit costs had declined 12% year-over-year by the end of September 1998.

Falconbridge (FL-T) is trying to push production costs down to US$1.30 per lb. (US$2,870 per tonne) by the end of 2000. So far, the company has reported that operating costs have declined only at the Integrated Nickel Operations (comprising the Sudbury mines and smelter, and the Nikkelverk refinery in Kristiansand, Norway). Unlike Inco, Falconbridge has not slated any hard-rock mine closures, though its Falconbridge Dominicana laterite operation is on a 3-month standby.

Closing lower-grade mines bodes ill for the underground phase of the Voisey’s Bay project, where the 50-million-tonne Eastern Deeps resource has an estimated grade of 1.36% nickel, 0.67% copper and 0.09% cobalt, significantly lower than the open-pittable Ovoid zone.

While AME makes a convincing argument that the cost curve will squeeze to the left, several variables remain. The first is the real-world success of acid-leaching flowsheets, as AME itself concedes. The owners of the acid leach projects waiting in the wings (including Inco, Eramet/Le Nickel, and a crop of Australian companies) are not merely waiting on a market upturn, which may be slow in coming anyway; they are anxious to see how the metallurgy works in practice. If the technology performs poorly, that could put several large laterite projects on the back autoclave.

A second variable is the market for nickel byproducts. Copper, which is still staggering after the speculative beating of 1996 and the economic crash of 1997, has traditionally provided big credits for the hard-rock producers, and will have to recover before many of those miners reach their cost goals.

Cobalt, a long-time friend of the sulphide producers, continues its spiral dive. The hopes are that significant production will not soon come from the African copper belt, and that economic recovery will be felt in the steel industry sooner and not later. The fears are that supply will rise without any recovery in demand, a situation that could make US$8 per lb. look very, very good.

If the new laterite projects do produce large quantities of cobalt, the depressing effect on the market would cut into the credits those very projects make from their cobalt production.

The third variable, of course, is the price performance of nickel itself. Small top lines never, ever make large bottom lines.

General predictions of commodity prices are bearish. The Canadian Imperial Bank of Commerce recently pointed out that Asian markets accounted for twice as much copper and nickel consumption, per unit of economic activity, than did the mature economies of Europe and North America; continued recession in Asia would be the worst possible news for metal prices.

The Bank of Nova Scotia echoes CIBC’s sentiments and adds that a slowdown in the U.S. economy could also hurt prices. Canaccord Capital’s technical analyst, Brent Woyat, sees some hope in the trendlines of the nickel market but agrees that fundamentals are poor.

Industry analysts see the market remaining out of balance for at least the next two years. Metal trader Billiton Metals predicts surpluses of 10,000 tonnes in 1998 and 42,000 in 1999, while Falconbridge sees a 35,000-tonne surplus in 1998 and 18,000 tonnes in 1999.

Increased production, from any source, would be certain to push the price down, forcing out the highest-cost producers, which are generally laterite roasters and high-cost underground mines. The result would be a different nickel industry, but not necessarily a healthier one.