Producers put project dollars into nickel

Engineering and Mining Journal, Apr 2001 by Carter, Russell A

Nickel prices brightened producers' balance sheets last year, but will an influx of new projects upset the market?

The year-to-year health of the primary nickel industry is closely tied to demand for stainless steel, as two-thirds of all nickel produced in the world is used to make various types of austenitic (nickel-bearing) steel products. Demand for stainless steel both worldwide and in the United States was strong during last year, with overall global demand for nickel outstripping supply. Despite the supply/demand imbalance, warehouse stocks of nickel remained relatively constant due to the high level of mine output, and resurgent economic growth in Asia, along with high demand in Europe and the U.S. supported high prices throughout the year.

However, the wave of prosperity that propelled many nickel producers to record earnings in 2000 seems to have crested, and a softening of the market in the early months of 2001 has washed away a bit of the optimism generated by last year's strong performance. In fact, producers are starting to sound some cautionary notes.

Hugh Morgan, CEO of Australian nickel miner WMC, recently told an audience of stock analysts that the nickel sector needed consolidation among producers to improve shareholder return and reduce the metal's price variability-and that, based on the current strength of its nickel division, WMC stands ready to play an active role in the consolidation process.

Just a few months earlier, Mike Salamon, executive director responsible for nickel and ferroalloys business at Billiton plc, succinctly summarized primary nickel producers' frustrations at a nickel conference held in Melbourne, Australia, last November.

"The nickel industry works its projects hard but fails miserably in terms of stock market ratings," said Salamon. "There appear to be three underlying themes:

* Consistently underestimating the technical complexity of capital-intensive metallurgical processes;

* Volatile prices, combined with wide divergence between realistic and optimistic project performance, leading to the perception that almost any project would appear to be an attractive investment; and

* Industry assumptions that tend to be oversimplified.

Despite these problems, said Salamon, nickel is a "high-growth" sector and can reward the "discerning investor who understands and manages the project risk."

Last year's robust market certainly rewarded producers. Inco, for example, reported that its realized average price for nickel in 2000 was $8,649/mt, while nickel cash costs fell to $2,723/mt, down from $2,778/mt in 1999. WMC said the operating profit from its nickel division rose $389% to $A823M last year, with unit cost of sales for nickel at a record-low $A3.19/lb. Falconbridge's average realized price for nickel increased by 47% from $2.78/lb in 1999 to $4.09/lb in 2000. Billiton reported that strong metal prices gave its nickel business an operating profit of $140M in 2000, compared with a loss of $20M in the previous year.

Technological advances in nickel recovery and the prospect of production from new, high-grade deposits have prompted some industry observers to predict that cash production costs of nickel may drop more than 10% by 2003-after having been reduced 17% in the years prior to 1999. AME, for example, estimates that the average cash nickel production cost in 2002, net of credits, will be about $1.60/lb, down 31% from 1993 costs. And, to complete this pleasant scenario, the International Nickel Study Group predicts that primary nickel consumption could increase 3.5% in 2001 to 1.17M mt.

There are, however, some potential rain clouds on the horizon. WMC estimates that its costs could rise 10-15% in 2001, due to factors that include higher energy charges and increased costs associated with project development in Western Australia. Billiton said its gains in 2000 from stronger nickel prices and operating efficiencies were offset by reduced sales volume, increased energy costs, and a decrease in cobalt prices. Inco officials have voiced concern that a higher level of output from the Russian producer Norilsk-after a year of reduced export activity-could throw the market into a surplus situation.

And three recent Australian, "first-generation", nickel startups, designed to exploit laterite deposits by high-pressure acid leach processing, have experienced ongoing difficulties in reaching projected production levels. The problems have not generally involved basic PAL-flowsheet concepts, but instead involve materials of construction, seals, and valve integrity.

Despite the shaky ramp-ups experienced at the three pioneering, first-generation laterite PAL operations-Cawse, Murrin Murrin, and Bulong-in Western Australia, at least two are studying the feasibility of expanding their production capacity.

These hints of future market volatility don't appear to have dampened plans for future nickel project development. E&MJ's "2001Project Survey" of mine-project investments, published in January, lists 37 projects for which nickel is the primary product or coproduct.