A sniffle in Indonesia, sneezes and coughs in Australia and New Caledonia and a possible full-blown case of the flu in Sudbury are all causing the price of nickel to explode reaching levels we never thought possible.
On Friday, the three month price of nickel hit another record high of $38,950 (US) a ton - $17.67 a pound - before closing at $38,100. The cash price hit about $40,500 or $18.74 a pound.
To date, the silvery-grey metal is up 17 percent this year and about 180 percent from the beginning of 2006. Nickel is now trading at a little over a dollar per ounce.
As of Tuesday morning the price has retreated a little from Friday's record high but if there is a strike at Xstrata Nickel expect to see the metal hit $20 a pound at the very least.
Two weeks ago, a British container ship named the "MSC Napoli" ran aground on the south coast of England. It was rumoured to be carrying 1,000 tons of nickel causing the then, price to set record highs. The actual amount of nickel was a paltry 160 tons.
Neurotic responses to nickel supply problems.
Last week, the metal was setting price records practically every day on the possibility of a strike by Xstrata Nickel workers in Sudbury. The local Falconbridge smelter produces 63,000 tons of nickel in matte, only four percent of global production. That is how thinly stretched global nickel supplies are at the present time causing the markets to neurotically respond to every little supply difficulty.
Even if a miracle occurs and Xstrata Nickel settles with Local 598, and the price drops a little, the underlying issue is that supply cannot meet demand.
Decades of underinvestment in new mines, a shortage of skilled professionals, powerful environmental movements and enormous cost blowouts at two major existing projects are all coming together to slow down new production.
In November 2006, CVRD Inco announced that the New Caledonia Goro nickel laterite development would be delayed until late 2008 and the previously estimated cost of $2.15 billion had ballooned to $3 billion. This 60,000 tonnes-a-year project has experienced heated political opposition due to environmental concerns and vandalism on the construction site from a militant faction of the indigenous Kanak people called the Rheebu Nuu. BHP-Billiton's Australian nickel laterite project is also experiencing cost blowouts and is delayed until early 2008 due to lower labour productivity and late delivery of essential equipment.
Combine the above with the political instability or lack of infrastructure in many of the countries that have nickel deposits and a perfect storm for continued shortages is assured.
New Caledonia's nickel mining and smelting industry has been severely disrupted over the past four months by strikes partly aimed at the Goro project even though the workers were employed by Societe Le Nickel, a subsidiary of France's Eramet.
Another major issue is the wear and tear of existing mining infrastructure. The nickel industry has been running flat out since 2003 with very little time for regular maintenance. Last year, equipment breakdowns at Inco's Ontario and Manitoba operations and a fire in the electric furnace at their Indonesian facilities helped reduce nickel output. Similar problems are plaguing other nickel producers around the globe.
CVRD investing
Last Friday's announcement by CVRD Inco to spend $477 million (US) on maintenance at its Canadian nickel operations in 2007 confirms the necessity of revamping these aging but essential assets. This figure represents 28 percent of total maintenance expenditures, given the low level of investment in the period 2003-2005, an annual average of $208 million.
CVRD Inco is currently developing three of the four largest nickel projects in the world. Once completed, the company will become the globe's largest producer of nickel. CVRD Inco has budgeted $613 million for the Onca Puma laterite project in Brazil. This mineral development contains a saprolite ore that will be processed with traditional smelter technology. The Vermelho laterite project, also in Brazil has not yet received environmental approvals but will use the HPAL chemical process due to the type of ore in the deposit called limonite.
CVRD Inco is currently reviewing the Goro nickel project due to cost increases and the previously mentioned political and environmental concerns. The New Caledonia project will also use the HPAL chemical process.
It has been often repeated that the world needs a new "Goro" sized project every year. Further delays with Goro would have a major impact on global nickel supplies and prices. Xstrata Nickel's Koniambo project, on the northern part of New Caledonia would also be postponed as a tiny island, with a population of about 233,000 and a limited infrastructure, could not support two massive projects at the same time.
Military demand
Nickel has always been an essential raw material for war ranging from jet engines to armor plating for tanks and ships. The American wars in Iraq and Afghanistan consume billions of dollars worth of military hardware that are consuming vast quantities of nickel. Last spring, China announced a 14 percent increase in military spending. For the past decade that country has seen double-digit defence growth and the recent decision to shoot down its own satellite may start an arms race in space. Russian President Putin has also confirmed that military expenditures would also be a top priority in order to reassert that country's global influence. Military demands on the nickel market is the elephant in the room, no one seems to be discussing.
Furthermore, in 2006, the sizzling Chinese economy - the fourth largest in the world - grew by 10.7 percent. Aside from a higher standard of living and intensive industrialization, China desperately needs double digit growth to absorb the tens if not hundreds of millions of rural people migrating to the cities. It is the largest human migration in the history of mankind. Millions of unemployed workers would be a serious threat to the social cohesion of the country.
The metallic "Achilles Heel" to China's enormous growth and political stability is nickel. The metal is used in about 300,000 different products and is essential for any industrial economy. Stainless steel production, which uses about 70 percent of global nickel production, was up by 12 percent in 2006. China recently announced that it intends to stockpile strategic metals. This will only increase pressures on scarce supplies of nickel.
Earlier this month, the Deutsche Bank has forecasted a nickel supply deficit in 2007 of 198,900 tonnes and a 166,800 tonnes deficit in 2008 mainly as a result of production delays at Goro and Ravensthorpe.
In a 2006 year-end summary, Patricia Mohr, vice-president and commodity market specialist at Scotia Economics stated, "a super-cycle is expected in nickel, with prices staying strong through 2008."
Economic war
Jack Lifton, in a column on resources investor.com recently wrote, "An economic war has already begun over the control of the supply of industrially necessary metals and materials with which to establish or maintain a high standard of living. This war is between the United States and the PRC…." (People's Republic of China)
The Sudbury Basin, with the first or second largest reserves of nickel after the Norilsk deposits - pending on how you define these mineral reserves in the ground - is on the frontlines of that war.
For the past 30 years, a global surplus of cheap nickel has lulled the entire world into a dangerous complacency about this immensely strategic and vital metal.
With at least another hundred years of ore in the ground, a dynamic and growing mining supply and service sector, the highest concentration of mining related post-secondary education programs in the country and innovative industry research, Sudbury is well on its way to becoming a global centre of hard-rock mining excellence.
Stan Sudol is a Toronto-based communications consultant and policy analyst who writes extensively on mining issues. [email protected] .
