Promise for nickel market as China could miss targets

CONFERENCE CALL: The market bottom for nickel has most likely been reached with an upswing pending, according to Australia’s third largest nickel producer.

Speaking in Perth at the 2012 Paydirt Australian Nickel Conference, Western Areas (ASX:WSA) managing director Daniel Lougher, said that while the base metals’ current price made it uneconomic for many mines, it simultaneously was choking any new supply potential and that would drive the upswing,

The more positive price outlook was also enhanced by the pending limited sources of good quality nickel future supply for smelters, as there was now emerging margin compression on nickel pig iron, which is a poorer nickel substitute relied on by some smelters.

“In addition, the huge laterite nickel projects continue to be serial underperformers with capex blowouts, failure to meet production targets and high energy demands,” Lougher told the conference.

“Indonesia also recently added to the changing market outlook, imposing nickel ore export bans and tax hikes.

“There had also been no major new discoveries in conventional nickel sulphide, with maturing nickel camps still servicing 45 per cent of global nickel production.”

Lougher said most analysts were tipping the pickup over the next three to six months – which would coincide with pickup in seasonal demand.

Western Areas produces around 31,000 tonnes of nickel mined and 25,000 tonnes of nickel in concentrate, ranking it the country’s third largest producer behind BHP-B Nickel West and Glencore.

Its operations are heavily centred on the Wiluna to Ravensthorpe corridor of Western Australia, but the company has expanding operations located in Canada and Finland.

The Finland operation is the possible subject of a listing on London’s AIM, although Lougher did indicate this was, “dependent on market conditions.”

“What the market needs to recognise more fully is that nickel is a very cyclical commodity,” he said.

“In the past 12 years, Western Areas has had to deal with nickel prices ranging from US$3.00 a pound to US$23.00 per pound.

“Yet throughout these cycles, we have still managed to raise $300 million in development capital, commission two mines, grow resources, reserves and production and construct then expand our nickel concentrator.”

Also speaking at the conference was Sydney based resources analyst AME Group senior nickel analyst Piers Montgomery.

He warned conference delegates that planned new nickel production in China may not ever eventuate as the country’s economy struggles to balance its ore sourcing requirements.  

Montgomery said the basis of the problem was increasing restrictions on the lesser feeder stock, taking nickel pig iron to a point where, “nickel pigs won’t be flying”.

“There are a number of ‘possible’ nickel production scenarios facing China,” Montgomery said.

He indicated that total Chinese finished nickel production capacity could be as high as 900,000 tonnes by 2015 if all large-scale new projects are delivered, at which point China could then be a net exporter of nickel.

New capacity under construction in China overwhelmingly relies on medium to high-grade saprolite nickel ore as feedstock.

“Due to falling grades, these ore types have already become difficult to source in large volumes,” Montgomery explained.

“And if you look at where China sources its ore – 53 per cent of its imports last year came from Indonesia – a large producer of nickel pig iron – but fast forward to this year and these same import flows reduced by 65 per cent between May and July – and – Indonesia is currently imposing export bans.

“Replacement sources from the Philippines are lower grade and highly seasonal.

“Take Indonesia ore out of the equation and Chinese finished nickel production may peak as early as next year and it is entirely plausible that some new capacity may never enter production.”

Montgomery said the slowdown in the Chinese Indonesian nickel link was evident as recent as August with Chinese imports of Indonesian ore remaining at 1.5 million tonnes.

“After consistent builds for the past year, stocks of nickel ores at Chinese ports have also begun to decline so that puts further pressure on China’s ore sourcing capacity going forward,” he said.