hedging at under 24000 per tonne, page-21

Here is another view (taken from another forum)


In a period of resource markets buoyancy, nickel has been the standout performer. In the first five months of 2007, nickel prices averaged around US$45 000 a tonne, 86 per cent higher than the average for 2006 (US$24 250) and an increase of 172 per cent year on year. These prices are the highest ever (in real terms), reflecting low stocks and constrained growth in production capacity. Nickel stocks are currently at a historical low of 2.5 weeks of world consumption.

The rapid increase in the nickel price since 2005 has been the result of strong demand growth for stainless steel and nickel alloys coupled with supply constraints, such as a lack of new production capacity and labour disputes. As a result of the tight supply–demand situation, any real or perceived threat to the future availability of nickel such as labour strikes, port closures or project delays, has resulted in price increases.

prices to remain high in 2007 and 2008
In mid-May, nickel prices were around US$54 000 a tonne, more than double the 2006 average. Prices eased early in June to around US$40 000 a tonne as London Metal Exchange (LME) stocks increased and changes to LME nickel metal lending rules were announced. In 2007 as a whole, nickel prices are forecast to average around US$41 500 a tonne, an increase of 71 per cent on the 2006 average. The record nickel prices in 2007 reflect strong growth in demand for stainless steel in China, robust demand for nickel alloys because of increased orders for commercial, civil and military aircraft and limited additions to global nickel production capacity.

Nickel stocks are expected to build slowly toward the end of 2008 as growth in mine production, supported by production of nickel pig iron in China, outpaces demand growth. Reflecting the improved supply–demand situation, nickel prices are forecast to ease in 2008 to average around US$35 000 a tonne — still very high in historical terms. However, falls in nickel prices are expected to be limited by the rate at which new mines are able to reach full production capacity and by the high cost of producing nickel pig iron.





substitution possibilities limited
During the first quarter of 2007, nickel prices averaged 180 per cent higher than in the March quarter 2006. Yet during the same period, world consumption of primary nickel increased by 8 per cent year on year, reflecting limited substitution options. The recent increases in nickel prices have flowed through to stainless steel prices and encouraged substitution away from stainless steels containing nickel to the limited extent that this is possible. For some applications, plastics or galvanised steel can be used but in many instances the product must have properties — such as corrosion resistance — that can only be achieved by the use of stainless steel that contains nickel. As a result, the consumption of nickel in stainless steel production has continued to increase. The stainless steel industry accounts for around 60 per cent of primary nickel consumption.

There are also few or no substitution possibilities in some industry applications, such as aerospace, where changing the chemical composition of superalloys used or switching to an alternative material would require substantial research and development costs. Nickel based superalloys are used in the aerospace industry in turbine blades and components of jet engines, in the oil and gas industry for downhole tubing and in turbines in gas fired engines for electrical power generation because of their corrosion resistance and strength at high temperatures. Given the small proportion of total costs accounted for by nickel in these applications, demand for nickel in superalloys is continuing to rise, despite the high nickel price.


Nickel pig iron, also referred to as nickel chromium pig iron, is a ferronickel pig iron produced from low grade nickel laterite ore sourced primarily from Indonesia and the Philippines. Nickel pig iron generally contains less than 5 per cent nickel (compared with 25–40 per cent in conventional ferronickel) and has a higher phosphorous and sulfur content than conventional ferronickel. However, some producers are reporting that they are able to produce nickel pig iron with a nickel content of up to 30 per cent.

China is currently the only country known to be producing nickel pig iron. The product is not exported since it attracts a 10 per cent export tax. In an attempt to contain costs, some stainless steel producers in China are using nickel pig iron as a partial substitute for some of the refined nickel metal or ferronickel used in the manufacturing process to offset high nickel prices. Nickel pig iron is cheaper than conventional ferronickel; however, its use is limited by high concentrations of phosphorous and carbon. Nickel pig iron is consumed primarily in the production of 200 series stainless steels, which have a lower nickel content than the 300 series.

In the short term, nickel pig iron production capacity could replace up to 80 000 tonnes of nickel, mainly in the production of the lower grade 200 series stainless steels. However, increased use of nickel pig iron is not expected to result in a reduction in overall demand for nickel. Nevertheless, it may slow growth in demand for refined nickel or ferronickel as it supplements supplies of the metal.
The use of nickel pig iron in 300 series stainless steels has so far been limited, since nickel pig iron is still in an experimental phase. Attempts are being made to increase its use in the 300 series; however, it is uncertain how purchasers and end users of stainless steel will respond to what is currently seen as a low quality material being used in higher grade stainless steels.

Relatively high production costs mean that the scope for significant production and use of nickel pig iron on a longer term basis may be limited. The cost of producing a tonne of nickel pig iron with nickel content equivalent to that of refined nickel is approximately US$26 000 — which at current prices results in an attractive return to producers. In comparison, the highest reported cash costs for producing refined nickel are around US$9900 a tonne (mining costs of US$7700 a tonne and refining costs of US$2200 a tonne). This means lower nickel prices over the medium term, as more supply capacity comes into operation, are likely to result in the closure of nickel pig iron capacity.

A further difficulty in expanding nickel pig iron capacity in China is that the government is moving to consolidate industries associated with iron and steel production to improve competitiveness, resource utilisation and to limit environmental damage. Under these policies, it is unlikely that nickel pig iron production will continue to grow in the medium term as it is produced in small, localised blast and electric arc furnaces, is energy intensive and emits high levels of pollutants.



consumption growth forecast to remain high but moderating
In 2007, world nickel consumption is forecast to increase by over 4 per cent to 1.46 million tonnes. Nickel demand in China is expected to remain strong, with consumption forecast to grow by around 23 per cent to 312 000 tonnes in 2007 as strong growth in industrial production drives increased demand for stainless steel and hence also for nickel. Higher domestic production capacity in China has reduced the need to import stainless steel. Reflecting this, stainless steel imports declined from 500 000 tonnes in the first quarter of 2006 to 98 000 tonnes in the first quarter of this year.

Growth in nickel consumption in Europe and the United States is forecast to moderate in 2007 as stainless steel production falls. Very high and volatile nickel prices have encouraged EU and US suppliers to draw down existing stocks of stainless steel. This year, producers are expected to meet orders from stocks as far as possible, particularly in the September quarter when demand is typically lower.
In 2008, world nickel consumption is forecast to increase by around 3 per cent to 1.50 million tonnes, mainly reflecting continued growth in China’s industrial production and construction activity. In addition, there is expected to be continued growth in consumption of stainless steel, nickel superalloys in the aerospace industry and increased use of nickel in batteries.

production increasing slowly
In 2007, mine production is forecast to rise by 2 per cent to 1.50 million tonnes, supported by increased output from existing mines in the Russian Federation, Canada, the Philippines and Indonesia.
In 2008, nickel mine production is forecast to increase by 3 per cent to 1.56 million tonnes. The increase in production reflects the commencement of production at a number of mines around the world, including in Turkey, Brazil, New Caledonia and Australia. The full benefit of increased production from this new capacity is not expected to be realised until after 2008, reflecting the time required for production to reach full capacity.
Despite only moderate growth in mine output in 2007, production of refined nickel is forecast to increase by 6 per cent to 1.43 million tonnes. Increased production is expected to occur at existing refineries that have been operating below capacity and from small additions to capacity, particularly in China.

Refined nickel production is forecast to increase by 5 per cent to 1.51 million tonnes in 2008 as new mines provide increased input for nickel smelters. China is expected to account for a significant proportion of increased output of ferronickel. Refining capacity outside China will also increase in 2008, largely from the expansion at BHP Billiton’s Yabulu refinery in Australia.

Australian production and exports rising
Mine production in Australia in 2006-07 is estimated to have increased by 6 per cent to 198 000 tonnes. Western Areas’ Forrestania project (capacity of 13 000 tonnes a year) commenced operation during the March quarter, and there were fewer supply disruptions from cyclones in Western Australia than in 2005-06.

In 2007-08, production is forecast to increase by 16 per cent to 230 000 tonnes. Allegiance’s Avebury mine (capacity of 8500 tonnes a year) in Tasmania is scheduled to start operations at the end of 2007 and BHP Billiton’s Ravensthorpe project in Western Australia (capacity of 50 000 tonnes a year) is due to be commissioned in early 2008. A planned shutdown at Minara Resources’ Murrin Murrin operations in late 2007 may offset some of the production gains associated with the increased production capacity in 2007-08.
Refined nickel production is estimated to have increased by 6 per cent to 122 000 tonnes in 2006-07. Increased production at Kalgoorlie throughout the year is expected to have offset lower production at Kwinana in the March quarter during a planned maintenance shutdown.

nickel outlook

2006 2007 f 2008 f % change
World
Production kt 1 352 1 434 1 506 5.0
Consumption kt 1 401 1 463 1 501 2.6
Closing stocks kt 87 58 62 6.9
– weeks consumption 3.2 2.0 2.2 10.0
Price US$/t 24 252 41 500 35 000 – 15.7
USc/lb 1 100 1 882 1 588 – 15.7

2005 2006 2007
Australia -06 -07 s -08 f
Production
Mine kt 186 198 230 16.2
Refined kt 115 122 141 15.6
Intermediate kt 74 61 64 4.9
Exports s kt 198 225 265 17.8
– value A$m 3 457 9 024 9 973 10.5

See back tables for details. s ABARE estimate. f ABARE forecast.

download excel data

The value of Australian nickel exports is estimated to have risen by 160 per cent in 2006-07 to $9.02 billion and is forecast to increase by a further 11 per cent in 2007-08 to $10.0 billion, reflecting the high forecast world nickel prices and increased export volumes.