Estimated Supply Forecasts (million tonnes) For:
2007 - 1,4372008 - 1,4942009 - 1,575
Estimated Consumption Forecasts (million tonnes) For:
2007 - 1,450
2008 - 1,522
2009 - 1,592
28,000 tonne net deficit in 200613,000 tonne net deficit forecasted in 200728,000 tonne net deficit forecasted in 200817,000 tonne net deficit forecasted in 2009(Courtesy Canaccord Adams)
UsesThe biggest use is as an alloying metal along with chromium and other metals in the production of stainless and heat-resisting steels. These are mostly used in construction, but also for products in the home such as pots and pans, kitchen sinks, etc. In fact, about 65 per cent of nickel is used to manufacture stainless steels and 20 per cent in other steel and non-ferrous (including "super") alloys, often for highly specialized industrial, aerospace and military applications. About 9 per cent is used in plating and 6 per cent in other uses including coins and a variety of nickel chemicals.
Why You Should CareNickel prices rose to $50,000 per tonne at the London Metal Exchange for the first time ever on Thursday(April 5, 2007), boosted by falling inventories and strong demand. At this level, it has
gained almost 50 percent since the start of 2007, and is more than twice as expensive as it was this time a year ago. Most attribute the steep rise in nickel prices to be due to steel-hungry China, leading many to believe that the "workshop of the world" along with Brazil, Russia and India will continue to drive demand growth for nickel and other metals in coming years.
The staggering growth in Chinese nickel consumption over the first half of this decade is
showing no signs of tapering off. In 2000, China’s nickel consumption increased by 49.9% year-over-year to about 65,000 tonnes of nickel, representing about 5.8% of global consumption. By 2006, the country consumed 250,000 tonnes of nickel, representing about 18.3% of global consumption. In the 2000-2006 period, China’s stainless steel production increased from 524,000 tonnes to 4.8 million tonnes. With the exception of an unanticipated economic collapse,
China is anticipated to consume over 400,000 tonnes of nickel per annum by 2010,
representing about 24.3% of global consumption, as the country’s stainless production is forecast to reach an astonishing 9.6 million tones per year by 2010. However, annual consumption growth rates are anticipated to fall to a more sustainable 10% by the end of this decade.
In light of the current spot price and market outlook, Canaccord Adams recently increased their forecast average nickel prices to:
2007: $17.13/lb2008: $14.50/lb2009: $12.00/lb2010: $9.00/lb2011: $7.00/lbRaymond James Equity Research is predicting continual strength in base metals prices, although by 2010 they predict a falling back – but even so, they maintain that most commodity prices will remain above 2005 levels.
Their Nickel Price Forecast For:
2007: $18.14/lb2010: $8.50/lbNickel Pig Iron --- A Replacement?
The growth of direct shipping laterite ore would appear to be the most significant threat
to the supply-side equation of the nickel market in the years ahead. “Laterite ores, containing nickel and cobalt, are imported from the Philippines, Indonesia and New Caledonia to China. They are processed in blast furnaces to make nickel pig iron, which contains between about 1 % and 3 %nickel. Chinese stainless-steel producers including Baosteel Group are increasingly relying on so-called nickel pig iron to trim production costs, Macquarie Bank said. The raw material is a cheaper alternative to refined nickel, and China may produce as much as 80,000 tons this year.”
http://www.bloomberg.com/apps/news?pid=20601012&sid=ayaq4Y6qR8k4&refer=commoditiesIt’s estimated that the
production of direct shipping laterite ore increased from only 5,000 tonnes in 2005 to approximately 26,000 tonnes last year. Canaccord Adams forecasts supply of laterite ore to be
45,000 tonnes this year (2007), 65,000 tonnes in 2008 and 75,000 tonnes in 2009. However, given the relatively high cost of this supply, “Prices for ore used to produce nickel pig iron are rising, Macquarie Bank said,” (Bloomberg) direct shipping laterite ore is likely to be the first source of supply to be reduced when nickel prices finally retreat to more historical levels. “
The price of limonite, a type of laterite ore, ore in the domestic market has doubled over the past year to around $128 a ton, causing a ``massive'' rise in producers' cash costs to as much as $30,000 a ton, from about $15,000 a ton, the analysts said.” (Bloomberg)
Medium and Longer Term OutlookIn the medium term (2010-2011), new production from several large-scale Greenfield
projects is likely to overhang the market. However, any further unanticipated
development delay or production ramp up in even one or two of these projects could
easily swing nickel prices.
In the longer term (2012 and beyond), the outlook for nickel remains extremely
encouraging. The current slate of scheduled Greenfield developments should be easily
absorbed by the market, as China’s insatiable appetite for nickel appears to have no
immediate end in sight. According to the United Nations,
China’s urban population is projected to increase by 78 million people in the four years to 2010. Construction activity in China will need to continue at a rapid pace in order to accommodate this influx of people, providing a strong driver for nickel consumption over the medium term.
Urban incomes in China are also growing strongly (10 per cent in 2006) and are assumed to continue to grow. Such growth can be
expected to feed rising demand for consumer goods such as motor vehicles, mobile phones and other electronic equipment, thus increasing the demand for nickel in applications such as batteries, stainless steel and nickel alloys. Consumption of nickel in the United States grew by 11 per cent in 2006 to 150,800 tonnes and in the European Union by 10 per cent to 444 400 tonnes. Much of this growth is attributable to the demand for stainless steel from the residential and commercial building sectors.
Nickel demand in the United States is expected to either stabilize or lessen in 2007 following a slowing in residential construction activity. EU consumption growth is also expected to ease from last year’s high.
http://www.abareconomics.comFrom the supply side, escalating capital costs for new projects and their prohibitive absolute dollar costs (+$1.8 billion average), longer than anticipated production start-ups in laterite ore projects, combined with industry consolidation leading to more rational supply decisions, bodes well for nickel prices.
Rising project capital costsWith capital costs for new nickel projects facing significant growth across
the board from several sources, including a lack of engineering talent, higher
contractor rates, higher equipment and materials costs, etc., what were always
major barriers to entry are now even more prohibitive. “Capital costs for some of the
more recently proposed large-scale nickel projects including Ambatovy, Fenix, Goro, Koniambo, Onca Puma, Ravensthorpe, Sante Fe/Ipora, Tati Activox, and Vermelho, for example, continue to escalate, implying that the cost of new nickel capacity has now risen to an average of $18 per pound, representing an average project scope of $1.8 billion.
We note that capital expenditure estimates are likely to increase even further for several of these proposed projects, in line with the higher cost of nickel used in stainless construction materials” (Canaccord Adams).
Extremely Low InventoriesAt the end of 2006, total nickel inventories, including LME, producer, and consumer inventories, stood at about 86,000 tonnes, representing approximately 3.3 weeks of available consumption. Inventories fell from 2005 year-end levels of 114,000 tonnes, representing approximately 4.6 weeks of consumption. Based on our 13,000-tonne forecast nickel deficit this year, we predict that total inventories should fall to about 73,000 tonnes by year-end 2007, representing approximately 2.6 weeks of consumption. In 2008, we predict that another large 28,000 tonne deficit would reduce total inventories to an extremely low 45,000 tonnes by year-end, representing only 1.5 weeks of consumption. Moreover, with another 17,000-tonne deficit in 2009, we predict nickel inventories would fall to only 27,000 tonnes, representing only 0.9 weeks of consumption. However, in practical terms, total inventories are likely incapable of falling below 50,000 tonnes, due to the amount of inventory in process at any time. This implies that significantly high nickel prices will be required through the end of this decade to reduce forecast consumption levels, in line with available inventories.
Project DelaysAnticipated start-up delays in CVRD’s giant Goro project and BHP Billiton’s Ravensthorpe project, two of the world’s largest nickel mines, have been key drivers in the market. CVRD recently pushed back the start date for Goro to late 2008 or early 2009 from the fourth quarter this year, and raised the estimated cost by 40% to $3 billion. Goro is forecast to produce 60,000 tonnes of nickel a year at full capacity. Additionally, BHP delayed the planned start of Ravensthorpe to the first quarter of 2008 from the second quarter of 2007, and raised its costs to $2.2 billion from $1.4 billion. The Ravensthorpe mine will produce up to 50,000 tonnes per annum. Xstrata’s Koniambo project in New Caledonia, acquired from Falconbridge in November 2006, may produce 60,000 tonnes per year, but earliest possible start-up is scheduled for 2009.
Industry consolidationWith CVRD’s acquisition of Inco in 2006, Norilsk Nickel’s recent acquisition of OM Group’s nickel assets and Xstrata’s recent friendly bid for Lionore, the nickel market are gotten a lot smaller. Regarding the Lundin Mining bid for Lionore, Colin Benner, Lundin's vice-chairman, said via a conference call that "There's no better place to get into the nickel business than in our own backyard". Now when a 3.8 billion dollar marketcap company bids for another company at a 22.9% premium and investors still reward the acquirer with a 14.6% rise in share price, one has to wonder what investors liked so much about this deal..could it perhaps be the exposure to nickel? The
top four companies in the world control approximately 65% of the world’s supply. There are only two nickel companies in North America not owned by CVRD and Xstrata. They happen to be FNX Mining and First Nickel (both listed on the Toronto Stock Exchange). The great thing about this consolidation phase is that any junior nickel explorer/ producer (around 16) that finds a significant ore body has a very good shot of being taken out at a nice premium.
SummaryThe demand for nickel is projected to be strong for at least another 2 years due to the growth China and India and the industry is shrinking due to consolidation so if you happen to find a junior nicker explorer/ producer that is relatively unknown, hold on (maybe even add to it) or better still tell me about it.
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