The sky is falling, the sky is falling. Or so it seems to the many metallic "Chicken Littles" out there highlighting the plummeting price of nickel. The shinny grayish-white metal hit a three month low on Tuesday briefly dipping to $39,800 per tonne (US) on the London Metal Exchange (LME) for delivery in three months.
Substitution, nickel pig iron, and summer slowdowns are all
combining to pop the nickel bubble.
We all knew these "nose bleed" prices could not last - LME cash
price on May 16, 2007 was $24.59. But after a quarter century
of depressing levels - the record low was in December 1998 at
$1.76 - who could begrudge the then struggling producers their
time in the sun.
Even a drop to $10 a pound, as some have predicted this year
due to increasing production and declining use, would still let
nickel miners make enormous profits.
There is no doubt that lower grade and cheaper stainless steel
producers are not using nickel at these high costs. And some
substitution to other metals is happening in less essential
products like cutlery and home products.
However, high-end industrial uses like oil drill rigs, chemical
refineries and jet engines - just to mention a few - need the
nickel's unique corrosion resistant and high-temperature
properties that are not found in other metals.
The Chinese are resorting to nickel pig iron, which is a lower
grade nickel product that is expensive to produce.
Laterite nickel ore is imported mainly from New Caledonia, Indonesia, and the Philippines and processed in small scale blast or electric furnaces. However, this is not a long term source and is uneconomical if the price of nickel goes below $10 a pound. It is estimated that Chinese nickel pig iron production for 2007 will range from 70 to 90 thousand kilotonnes.
Who knows if prices will rise or fall?
Last week, New York based Amine Bouchentouf, the author of
Commodities for Dummies, interviewed me on the phone wondering
where I thought the price of nickel was heading.
Who really knows the answer to that "billion dollar"
question?
For the past year, well-paid analysts have routinely been
upgrading and down-grading the average price of nickel.
Half of them have been right and the other half embarrassingly wrong. In truth, the nickel industry is in uncharted waters. No one in a million years would have predicted these levels.
Unexpected geo-political events, continued technical delays or
increasing capital costs all have the potential to impact the
development of new projects. In late May, CVRD Inco announced
that the Vermelho laterite nickel project in Brazil would be
further delayed due to environmental and infrastructure
issues.
In my estimation, this nickel commodity super-cycle really got
started in 2003 when exploding Chinese demand first began to be
noticed in tandem with an unexpected strike at CVRD Inco and
coincidentally, the start of the Iraq war. You cannot fight a
modern war without using enormous quantities of nickel.
Citigroup forecasts that global primary nickel demand this year
will rise eight percent while the International Nickel Study
Group stated that production will exceed demand by 70,000
tonnes.
In a May 28, 2007 news release Patricia Mohr, vice-president,
economics and commodity market specialist at Scotiabank stated
"The recent acquisition of Canada's two largest nickel
producers, as well as a host of prospective smaller
transactions, reflects expectations that the international
supply/demand balance for nickel will remain in deficit through
the first half of 2008."
Yet one furnace breakdown, shortage of rain for hydro power or
unexpected strike in Norilsk, Thompson, Indonesia or New
Caledonia could quickly throw any of these projections out the
window.
Even though the current state of the nickel market is very
volatile, 100 or 200 or 300 million Chinese people migrating
from the countryside to urban centres over the next two decades
- the largest human migration in the history of mankind - will
ensure a voracious demand for nickel as well as copper, iron
ore and other base metals.
There will be bumps along the way, but the Sudbury Basin and
the rest of Northern Ontario - including many impoverished
Aboriginal communities - can benefit from that Chinese
migration for the next generation or two, depending on the
right provincial mineral policies.
CVRD Inco's recent commitment to spend $400 million to open the
Totten Mine and $45 million to further explore and study the
Copper Cliff Deep project is just the beginning.
During the past few decades with lower global demand for
nickel, the company had ignored many good B and C-grade
deposits to focus on the richest ore bodies. It will take many
years to bring new mines into development, but they will be
built.
Many feel Xstrata's Nickel Rim South mine may become one of the
richest in the history of the Sudbury Basin due to the high
nickel, copper and PGM grades.
FNX Mining Company Inc. recently quadrupled its resource base
in the Basin. This is just the first inning.
And with resource nationalism throughout the world, Sudbury is
one of the most politically secure places on the planet to
invest the billions needed to develop new nickel
production.
The local economy is booming. Sudbury has the lowest apartment
vacancy rate in all of Ontario. Regardless of some minor
problems - like a greedy provincial government not sharing
higher nickel mining taxes with this community - the city's
future is so bright that everyone should be wearing shades.
Something to think about while you are enjoying time by the
lakes this summer.
Stan Sudol is a Toronto-based communications consultant and
policy analyst who writes extensively on mining issues.
[email protected]
