New projects, China may pose threat to nickel recovery

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The global nickel market may be in supply deficit only briefly if producers manage to bring on line faster than expected new projects waiting in the wings.

Ultimately, these operations are needed to satisfy growth in the key stainless steel industry. But not now as demand recovers somewhat tentatively after a slump during the global economic recession.

Market watchers have assumed delays and slow ramp-up times to new mines and plants, particularly those using relatively new high pressure acid leach technology (HPAL), with its history of problems and abandoned projects.

The recent news that the processing plant at Vale's 60,000 tonnes per year (tpy) HPAL Goro project in New Caledonia has been delayed again will have been welcomed by a market struggling with record-high stocks.

But if it does get off the ground as planned later this year, it is due to be followed swiftly by several other large projects, not all of them using HPAL.

"You've got a whole raft of new projects that are coming on stream in the next two or three years," said Daniel Major, analyst at RBS.

On top of that, 20 percent of production -- idled in response to the global recession -- is overhanging the market and more output will restart once the long-running strike ends at Vale's Sudbury operations in Canada.

"Out of all the base metals you've got a huge amount of capacity which can come back on line to feed even a very bullish scenario in terms of demand," Major added.

Vanessa Davidson of industry consultants CRU Group said the main risk to a more balanced or deficit market was if projects get moving faster than anticipated.

"If combined with rapid growth in Chinese nickel in pig iron there is a risk the market could swing back into an over-supply situation in the next couple of years," she added.

Nickel in pig iron (NPI) is a lower grade nickel produced mainly in China and used domestically by stainless steel mills.

CRU assumes NPI output will not rise further and has built in slow ramp-up times for new projects. Goro is expected to take at least three years to reach its 60,000 tpy capacity.

Goro - When not if

Goro is not expected to follow some of its predecessors to the HPAL scrapyard.

"The question is not so much if Goro will come on stream but when, how quickly it will be able to ramp up," said Sean Mulshaw, an analyst at Brook Hunt, the metals arm of consultancy Wood Mackenzie.

"I think Goro is very close to starting. Having spent so much money on it I would be surprised if that metal didn't come to the market eventually," he added.

Close on its heels will be the 60,000 tpy Ambatovy project in Madagascar. Last month, part-owner Sherritt International, said "operational readiness activities" were well advanced. Commissioning activities are due to start later this year.

Davidson's CRU critically assumes no further increase in output of Chinese NPI, which has tended to more than plug supply gaps in recent years.

But were NPI output to rise from around 100,000-120,000 tpy to around 150,000 tpy then that could thwart supply deficits.

NPI is very price-sensitive, but largely profitable with nickel prices above $14,000-15,000 a tonne.

London Metal Exchange (LME) three-months nickel prices on Monday were last indicated at $22,630/730 a tonne, nearly treble the recession low of $8,850 seen in October 2008 and up from around $19,000 at the end of last year.

Many analysts predict double digit stainless steel production growth this year. CRU and Brook Hunt anticipate deficits in the next couple of years, reducing inventories to more manageable levels. At the end of last year total reported stocks of nickel were more than 100 days of demand.

But RBS takes a different view.

"...We don't envisage the market coming into balance or going into deficit until 2012/2013 and that's including a very strong rebound...in stainless demand," Major said.