Nickel prices to fall further, output cuts loom

A freefall in the nickel price from record highs above $50,000 a tonne is set to continue into next year, with the industrial metal likely to plunge well below $10,000 as a global economic downturn bites. But faced with slumping demand from steel mills and new mining projects coming on stream, producers will come out fighting and slash output further to provide a price bounce.

Nickel 3-month contracts in London were trading around $10,100 a tonne on Wednesday, down 80 percent from the all-time high of $51,800 hit in May 2007, and pushing the market to below break-even level for some miners. "At current prices some 50 percent of the nickel industry is losing money - it is not a sustainable situation," said Richard Knights, an analyst at Numis Securities.

"It is all about timing and how quickly operations shut down." The chill wind of recession is to blame for the plunge in nickel prices since 2007, but before the drop, many companies gave new developments the green-light in an attempt to keep up with high demand and record prices. Projects included Vale's massive Goro mine, due to start operating in late October or early November.

At full capacity, the New Caledonia project should yield 60,000 tonnes of nickel a year. Industry estimates put 250,000 tonnes of nickel coming onto the market in the next two years. LME nickel stocks are currently near its highest level since May 1999 and stand at over 55,470 tonnes -- suggesting a large surplus. Royal Bank of Scotland research this month said world finished nickel production was 1.434 million tonnes last year and forecast to fall to 1.415 million tonnes in 2008.

The RBS analysts added that consumption was 1.337 million tonnes last year and forecast to be 1.4 million this year -- an implied surplus of 97,000 tonnes and 15,000 tonnes respectively. The record nickel price triggered substitution by stainless steel mills to lower grade and cheaper alternatives. "On demand, it's difficult to be upbeat about prospects," said Neil Buxton, managing director at GFMS Metals Consulting. "Once a metal has lost market share, it rarely regains it." Average production costs are estimated at $10,500-$11,000 a tonne, and around $15,000 for the highest cost producers. And although priced in dollars, which has recently risen against currencies such as the Australian dollar, nickel producers in those countries won't be shielded from the downturn forever.

"Nickel producers can be forgiven for feeling somewhat schizophrenic about the outlook for their industry," RBS said. "Not so long ago they were enjoying a price environment beyond the dreams of avarice... But now the producers lurk in the shadows... Nickel remains besieged on all sides." CUT ABOVE THE REST But nickel producers are coming out fighting, slashing production to tackle low prices and the wider market slowdown. This week Canada's First Nickel Inc said it suspended production at its Lockerby Mine and cut some 150 jobs.

BHP Billiton Ltd shut down its 100,000 tonne per year Kalgoorlie smelter for four months of repairs during the summer, while Xstrata Plc temporarily suspended operations at its Falconbridge dominicana mine. And despite Chinese economic growth falling below 9 percent in the third quarter, Stephen Barnett, president of the Nickel Institute, remains upbeat on demand. "If that economy continues to grow at the 8-10 percent level, then that drives demand," he said. Barnett, whose institute represents about 85 percent of the nickel industry, also said the threat to prices brought on by more production coming onto the market is overplayed.

"The reality is that it takes 3-5 years to get it up to capacity usually... It will be very unlikely that you're going to get an additional 50-60,000 tonnes appearing on the market," he said. Greener environmental policies from governments will also boost demand, Barnett added, with wind turbines, nuclear power plants and hybrid vehicles all using nickel. "The long-term demand and strength is there," he said. "What you've got is one of those standard ups and downs -- that's called market forces."