New nickel pricing process proposed

The vice-president marketing and sales for Falconbridge Ltd. has taken issue with nickel pricing as it applies to the London Metal Exchange (lme).

“To say the least, Falconbridge is less than enamored with the current situation which involves the lme contract as a pricing vehicle,” John Gillies recently told a ferro- alloys conference in Monte Carlo.

At a time when the industry has been experiencing massive price fluctuations and changes in the pricing mechanisms, Gillies said in general the lme price does not allow producers to receive an adequate return on investment.

“If you doubt this, consider the last time a new nickel development of any size opened its doors. With my `of any size’ qualification in mind, the announced start-up of Namew Lake in northern Manitoba by Hudson Bay and Outokumpu is the exception,” he said. (The Hudson Bay Mining and Smelting and Outokumpu Mines project is expected to start producing during the fourth quarter of 1988.)

Capital costs for a fully integrated nickel plant today would be a “prohibitive” $10 (or more) per lb of annual production, Gillies said. The New Quebec Raglan prospect, 74% owned by Falconbridge, which Gillies described as the largest known undeveloped nickel sulphide deposit in the non-Communist world (hosting reserves of 11 million tonnes and grading 3.1% nickel and 0.8% copper), will not be developed at current prices unless other metals are found to supplement nickel and copper, he said. Lowest common denominator

The lme contract is based on the lowest common denominator of nickel, which Gillies said is unacceptable because nickel is made in a variety of physical forms with differing chemical characteristics. Only basic forms of the metal, such as full plate cathode, should be covered by the lme price, he said.

Possible manipulation because of relatively thin trading volumes of the metal on the lme is a concern, Gillies said, adding that price volatility is not in the industry’s best long term interest.

“It’s clear that on any given day, the lme price does not accurately represent the actual supply-demand balance of nickel in the marketplace,” he said. “In reality, it only represents what may be in the nickel books of traders. Because the lme is a terminal market of last resort, it almost guarantees a marginal price.”

Nickel, which averaged $1.760 1/2(US) in 1986 and $2.26 in 1985, was recently trading in the $2.70-$2.80 range, a price level Gillies said “guarantees there will be a shortage” of the metal. Investment in existing operations to maintain and extend capacity is not happening, he said. Reference point

Confessing he has no better alternative for a price basis, but confident one will be developed, Gillies said Falconbridge thinks “the lme price should be viewed only as a reference point which anchors the bottom end of the price spectrum” and should not be a final price arbiter. Falconbridge, he said, is reconsidering a proposal to have a producer price for ferronickel.

Falconbridge, which will be 60 years old in 1988, has diversified into zinc and copper through its acquisition (in 1986) of the Kidd Creek mine in northern Ontario, and Gillies said nickel today accounts for 27% of the company’s revenues compared with 52% two years ago.

Global consumption of nickel between 1982 and 1986 averaged 7% annually, he said, and this year it is expected to be 8%. Total consumption in 1987 at a projected 617,000 tonnes would be a record. A more moderate 2% annual growth rate in consumption is forecast for the next few years.