for HC nickel bulls i found this on the kitcometals website very interesting article from Shaws stockbroking.
No End In Sight For Nickel Strength 27/04/2007 By: Greg Peel
2006 saw an interesting development in the global nickel market. As prices surged to new, previously unthought of highs, a new market developed in "direct shipping laterite ore" which actually had the effect of reducing the 2006 deficit below that which had been previously anticipated.
But even this had little effect on the price.
Nickel ore is found globally in two major forms – sulphide and laterite. Laterite is exceedingly more abundant at 72% of known resources, yet sulphide represents 58% of nickel production. This is because nickel laterites suffer from complex mineralogy, notoriously low grades and very high processing costs. Laterite mining has a history of longer-than-expected production ramp-ups and cost overruns. On average, one hundred tonnes of laterite ore needs to be mined and processed to produce one tonne of nickel.
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Because of the high cost of laterite processing, smaller miners have previously not bothered with this abundant source as the cost exceeded the potential revenue. But now that the nickel price is in excess of US$23/lb, laterite ore can be processed commercially. Smaller miners do not have to invest in expensive processing plants. Instead, they simply ship the ore and sell it to supply-starved plants that have this capacity already. The high cost of shipping so much ore still falls short of prices achieved. Thus we now have a market in "direct shipping" laterite ore. Most of 2006's supply came from the Philippines and New Caledonia.
Canaccord Adams had previously predicted a global nickel deficit of 50,000t in 2006, but the end result was 28,000t due to the laterite invasion. If there's a lot more of this stuff lying around, then one could assume the nickel price will soon come under threat. Nearly all of the world's major currently proposed greenfield projects are laterite.
However, Canaccord is not assuming this to be the case. Were the nickel price to slip below its current levels, laterite mining, due to its high costs, would be the first to cease. Thus there is still a price support mechanism.
Canaccord estimates global nickel supply reached 1.34mt last year, representing a 4% increase. Demand reached 1.37mt, for a very strong consumption growth of 7.4%. And we all know where that came from.
While the Western world increased its nickel consumption by 4.4% in 2006, which was a stark rebound from the 4.7% fall of 2005, Chinese consumption increased by a ridiculous 25%, exceeding even the ridiculous figure of 23.5% in 2005. The major driver all round was a 12.4% increase in global stainless production. Global inventories at the end of 2006 had fallen, on Canaccord's estimates, to a very low 86,000t, or 3.3 weeks of consumption.
For 2007 Canaccord sees supply growth of 7.2% to 1.44mt, bolstered by direct shipping laterite ore. Consumption is expected to be 1.45mt, representing growth of 5.9%. China will contribute 17.4% and the Western world 3.5%. The deficit will fall to 13,000t, but available nickel inventories will fall to 73,000t or 2.6 weeks of consumption.
As we progress into time, Canaccord still cannot see supply outstripping demand. 2008 should bring 1.49mt of nickel but consumption will 1.52mt. The supply figure includes delays to Inco's giant Goro project and BHP Billiton's (BHP) Ravensthorpe project, still offset by direct shipping laterite ore. Inventories will fall to 45,000t or 1.5 weeks. This will be considered critical.
By 2009 several new projects should have started up, but tightness will remain. Production will reach 1.56mt and consumption 1.59mt. Following the Beijing Olympics Chinese consumption growth will fall to 9.6%. In theory, at this point all available nickel inventories will have been consumed. If there are no stocks available, says Canaccord, then only a high price for nickel can reduce demand.
Thus the implication is that significantly high nickel prices will be required through to the end of the decade in order to reduce forecast consumption levels in line with available inventories.
As far as the supply side is concerned, the biggest barrier is rising costs. These costs stem from a lack of engineering talent, higher contractor rates, and higher equipment and material costs. They were always a barrier, but they are now becoming prohibitive. Estimates suggest the cost of new nickel capacity has risen to US$18/lb, representing an average project scope of US$1.8bn, and it can only rise further.
At some point, the cycle will finally cool off, notes Canaccord. Most resource analysts still assume a long term nickel price of US$5.00-5.50/lb. But that seems a long way off at present, and many greenfield projects will likely be delayed until such time as costs become less prohibitive (thus only extending the delay).
Adding to the likelihood of extended high prices is consolidation in the market. Four companies – Norilsk Nickel, CVRD, Xstrata and BHP Billiton (BHP) – control 48% of the global mined nickel market and 56% of the refined market. This compares to global aluminium, copper and zinc where the top four producers only represent 35%, 31% and 23% of their respective markets. (This is explained to some extent by the fact that global nickel production is about 1.4mt, compared to 34mt, 17mt and 10mt for the other metals).
Canaccord suggests that this level of control in the nickel market will ensure a level of "discipline of supply". Usually when metal prices run up there is a rush to start new projects which ultimately leads to oversupply and price collapse. There is no advantage in the big four rushing out their new projects quickly, lest they see the nickel price subside. Already both CVRD and Xstrata have pushed back start-up dates for major projects.
And the demand side will still be all down to China. In 2000, China's nickel consumption increased by 50% to hit 65,000t, or 5.8% of global consumption. Consumption growth has not quite been so staggering since, but in 2006 China consumed 250,000t of nickel or 18.3% of global consumption. Over 2000-06, China's stainless steel production has increased from 524,000t to 4.8mt. Unless it suffers a spectacular economic collapse, China is expected to be consuming over 400,000t of nickel per annum by 2010.
It is going to take an extremely high nickel price to curtail nickel consumption, says Canaccord.
In the longer term – 2012 and beyond – Canaccord still believes the outlook for nickel remains "extremely encouraging". The current slate of greenfield developments should be easily absorbed by the market given there appears no end in sight to China's insatiable appetite. The high cost of ramp-up will also place a dampener on supply, including from laterite sources. And industry consolidation will ensure supply cannot get out of hand anyway.
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