The peak in 2004 probably coincides with the expected peak in world IP (industrial production) growth (for which commodity prices historically have a close correlation), while in 2006 a number of new nickel producing projects theoretically may be in production. The long-term nickel price during the 1990s has oscillated about the US$3.25/lb or US$3.50/lb region as shown in Figure 1, and that is where the long-term nickel price forecast comes from, but it does not appear to be that simple.

Figure 1. Monthly Nickel price US$/lb 1988 to 2003 Source : www.ozmine.com.au

Figure 2. Nickel Price US$/lb in 2002 Money terms Source : WMC Resources Nov 2003 presentation

Taking a non-technical charting perspective approach, the current move through US$5/lb (if sustained) could be seen as a chart-break with an upside target of US$8/lb (or higher), or a return to the nickel prices of the late 1980’s.

In his opening speech for the Paydirt conference, Brian Hurley gave an historic overview of the nickel market, highlighting that in the late 1960’s the nickel price was in fact 93c/lb as defined by the INCO producer price, which INCO raised to US$1.33/lb when their 1968/9 strike occurred (the free market actually rose to US$7/lb). However, due to the depreciation in the value of the US$, in real money terms, that US$1.33/lb actually becomes closer to US$6/lb (and that historic US$7/lb becomes more than US$31/lb).

Although WMC Resources in their presentation at the Sydney Mining Club on 6 November, stated that they thought that the nickel price would probably remain closer to US$4/lb than US$6/lb, they did show a chart of the nickel price in real 2002 money terms (as shown in Figure 2), in which the real long-term average nickel price could be about US$5/lb.

The basis for the fall in the nickel price in 2006 is founded on a number of greenfield projects commencing production as shown in Figure 3. This figure was produced by Falconbridge in mid-December 2002, and we have included it in Eagle’s reports since February 2003. However, there is a growing awareness that the shortfall may still be significant in 2010.

Figure 3. Nickel Supply and Demand to 2011 Source : Falconbridge Nickel

Figure 4. Nickel Supply and Demand to 2010 Source : LionOre Mining (from Macquarie)

Part of the shortfall problem is that most of the new nickel supply is sourced from nickel laterites being Goro, Koniambo and Ravensthorpe, and none of them have been given final approval to start construction because the estimated capital cost of either Goro or Koniambo is reputedly about US$1.5bn. The major companies are understandably reluctant to commit those funds if the nickel price falls back to US$3.25/lb since profit margins would be squeezed, but if they do not come into production, then nickel will be in even shorter supply.

Typical construction periods are 3 years and then possibly 5 years to attain full production (for example as has been achieved by Anaconda, although the second wave should have learnt some lessons from the first nickel laterite “wave”). Consequently, even if approval were to be given now, production could probably not realistically start until 2007.

An indication of the shortfall was given in the LionOre Mining presentation at the Paydirt Nickel Conference as shown in Figure 4 using known supply, with WMC Resources in their presentation at the Sydney Mining Club including “absolutely everything” that they could think of including an expansion at Norilsk to over 300,000tpa, resulting in Figure 5.

Figure 5. Nickel Supply and Demand to 2010 Source : WMC Resources

Figure 6. Nickel Demand (1950 to 2010) Source : LionOre Mining (from Macquarie)

It will be noticed that WMC have their nickel supply/demand almost in balance in 2003, then a drop back in nickel demand after peaking in 2004 before recovering in 2005. This is probably due in 2003 to Norilsk off-loading about 60,000t at the time of the INCO strike, and then a combination of the expected peak in world IP at the end of 2004, followed by a recovery in 2005 due to the expected aerospace cyclical demand for superalloys starting in 2005 and lasting until 2010.

However, the drop after 2004 may not occur, because of China. China has been estimated to require imports of 56,000t of nickel in 2003 in addition to the 60,000tpa being produced by Jinchuan. Jinchuan does plan to increase its nickel production to 100,000tpa by 2006 sourcing ore from Sally Malay and wherever else possible, however, that does not meet current demand and China’s nickel consumption is reputedly rising by 25% per year. Certainly from what we saw in a recent visit to China, there were no signs of China’s economy slowing down. If anything, demand was seen as likely to increase further as wealth levels rose and automobile demand increased.

The nickel supply-demand gap does depend on what average growth rate is being assumed through to 2010. As shown in Figure 6, LionOre have based their profile on an average increase of 3.3%pa. Falconbridge in their recent 3rd quarter presentation on 17 October, stated that they expected global stainless steel demand to be about 5.4% in 2003, increasing to a whopping 8.3% in 2004, rising again in 2005 and then being weak in 2006. With non stainless steel demand rising at 3% per year until the aerospace superalloys “kick-in” from 2005, the overall demand for nickel could rise by about 4.2%pa through to 2010.

If nickel demand does increase by 4.2% per year, then it means that supply must rise by 50,000t every year just to keep the nickel market in balance. It has been estimated that if all the new supply from all the possible new nickel sulphide mines in WA is added together then 50,000t may be attained, so that is one year of new demand covered, and after that…..

In their conference call, Falconbridge stated that the likelihood of supply shocks from overlooked unknown sources (like the Norilsk stockpile) was remote. Substitution by using lower nickel grades or higher percentages of chrome and manganese was possible if the nickel price remained high for some time. In their opinion, it was not a case of whatever peak price that nickel rises to above US$11,000/t, instead it was more a case of how long the nickel price remained high such that substitution could be considered as an alternative.

However, it should also be recognised that substitution meant using lesser quality or lower grades of contained nickel, and would require time to consider altering manufacturing plants for a different product.

It can be seen from the above discussion that there is a shortage of nickel, that demand appears likely to exceed supply until 2010 and probably beyond, and hence the nickel price appears likely to rise and settle at a new higher level, which could be much closer to US$5/lb than US$3/lb. The use of higher long-term nickel prices should increase the current valuations of nickel stocks, and consequently their share prices.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and holds interests in a number of nickel-exposed stocks. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.