abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Nickel

Outlook to 2014

Rebecca McCallum

After declining rapidly from the year’s high of US$33 000 a tonne in March 2008, to around US$9000 a tonne in December, the nickel price averaged US$21 100 a tonne for 2008 as a whole, the lowest since 2005. Prices are expected to average lower again in 2009, as current low prices are expected to persist throughout the first half of the year, with any recovery in the second half of 2009 forecast to be modest. Significant price volatility is projected to persist in the nickel market over the medium term.

Average price to halve in 2009…

In 2009, the world nickel spot price is forecast to average around US$10 500 a tonne. Prices are expected to be relatively low as demand for stainless steel remains weak and nickel stocks increase to around 6.6 weeks of world consumption. A gradual economic recovery in 2010 is forecast to result in only moderate increases in nickel prices before 2011, as demand for stainless steel is forecast to be relatively weak and stocks for both nickel and stainless steel remain high.

…with price volatility persisting in the medium term

Production cuts lagged declining consumption in 2008, resulting in rising stocks toward the end of the year. This situation is expected to reverse in 2009, as a number of producers have closed mines. As a result, nickel stocks are forecast to fall in 2009, to 6 weeks of world consumption.

Stocks are expected to decline to 4.9 weeks of world consumption in 2010 as producers continue to cut output and delay restarting operations until prices recover to more than US$18 000 a tonne. At prices significantly lower than this level, most producers will make only small, if any, profits. Because there are significant fixed costs associated with restarting operations, producers are likely to wait for prices to increase markedly above that level before committing to these costs. At the same time, nickel consumption is expected to begin recovering by 2010, resulting in stocks being drawn down and prices rising.

Prices are expected to increase rapidly in the second half of 2010, and into 2011, as consumers respond to improving economic prospects. Given recent price volatility, producers are expected to react cautiously when considering restarting operations or increasing capacity. A strong demand response will be needed to prompt price increases sufficient to encourage producers to restart. Therefore, operations are not expected to return to full capacity until around mid-2011, when prices are forecast to rise and remain above the marginal costs of large producers.

Prices are projected to peak in 2011 at around US$25 000 a tonne (in 2009 dollars), before declining to average around US$18 000 a tonne by 2014 as existing operations resume production in response to rising prices. A return to relatively high prices is also expected to encourage companies to develop delayed or deferred projects resulting in increased production.

Risks even within the volatility

There are significant risks associated with the medium term forecasts for nickel, particularly on the demand side. Currently, world economic growth is assumed to recover slowly from late 2009 or early 2010, and to return to levels more consistent with pre-global financial crisis potential by 2011. As a result, consumption of nickel is expected to follow a similar trend, with growth averaging 4 per cent from 2010. If the world economic recovery occurs later or slower than currently assumed, this will result in weaker nickel consumption growth and place downward pressure on prices until such a recovery occurs. This, in turn, would make production less profitable for producers and delay the start up of new mines or commissioning of projects currently on care and maintenance.

Conversely, if economic growth recovers more rapidly, or earlier, than anticipated, this would result in earlier, faster, and larger increases in nickel prices. Nickel consumption would increase more rapidly, while stocks would decline further because bringing new mines into production and reopening idled capacity is a relatively slow process.

Further falls in world consumption in 2009

World nickel consumption is expected to decline by around 2 per cent in 2009, after falling by 3 per cent in 2008. Nickel consumption is forecast to be around 1.25 million tonnes in 2009, the lowest since 2005. Non-residential construction activity and production of new transport vehicles, which account for more than one-third of nickel demand, are forecast to decline as a result of economic contraction in OECD economies and the weak growth in non-OECD economies. In addition, demand for consumer durables, which account for a further 20 per cent of nickel consumption, is expected to decline as lower consumer spending worldwide is expected to reduce demand for products such as fridges and washing machines. Demand for chemicals, paints, electronic equipment and other products in which nickel is used is also expected to decline as a result of sharply slower economic growth.

Consumption is forecast to recover slowly in 2010, increasing by around 3 per cent to 1.27 million tonnes as world economic growth gathers speed. Demand for nickel for use in industrial applications such as stainless steel and superalloys is expected to recover first, as historically, industrial production recovers more rapidly than general economic activity and industry moves in association with an improvement in market sentiment.

Consumption growth projected to average 4 per cent from 2011 to 2014

Over the medium term, nickel consumption is projected to grow steadily, by around 4 per cent a year, to reach 1.53 million tonnes in 2014. Growth in industrial production in many emerging economies is expected to drive significant increases in nickel consumption to 2014. Stronger economic growth during this period is expected to result in increasing construction and consumption activity, driving demand for stainless steel and, therefore, nickel.

In addition, increased demand for nickel in new types of batteries is expected to create a new market for nickel. Demand for nickel-metal-hydride batteries is increasing as hybrid cars become more popular and cost-competitive. In addition, a variety of electronics applications such as mobile phones use nickel-metal-hydride batteries because of their superior recharge properties. Increased purchases of both electronic consumer goods and energy efficient motor vehicles, as a result of increases in real incomes, are expected to create a larger market for these batteries. A new nickel-zinc rechargeable battery is expected to become more widely available over the next few years, and is therefore expected to further increase demand for nickel in these applications.

Mine and refined production sharply lower in 2009…

World nickel mine production is forecast to decline by around 13 per cent in 2009 as low prices and high nickel stocks result in mine closures and production cuts in Canada, Australia and South America. At a price of US$11 000 a tonne (around US$5 a pound), around 30 per cent of the world’s nickel capacity is estimated to be uneconomic.

Also as a result of lower nickel prices in 2008, a number of nickel mines which were scheduled to be commissioned during 2009 are expected to be delayed as companies attempt to minimise costs. As a result, mine production is forecast to be around 1.29 million tonnes in 2009, down from 1.49 million tonnes in 2008.

As a result of lower mine production and lower expected revenues at refineries, refined nickel production is also expected to decline in 2009. A number of refineries and smelters around the world, particularly in China, Canada and the Dominican Republic, have closed or cut production. Refineries which have not specifically detailed production cuts are nevertheless expected to produce less nickel in 2009 because less ores and concentrates are available for processing.

…but both projected to recover over the medium term

In 2010, rising nickel prices are expected to encourage some mine and refined nickel producers with comparatively lower marginal costs to resume production or return to full capacity as nickel prices rise in line with falling stocks. However, production is not expected to increase as rapidly as consumption during the year.

As producers respond to rising nickel prices from late 2010, nickel mine production is forecast to increase rapidly in 2011 and 2012, by 6 per cent and 7 per cent, respectively. Existing mines are projected to resume full production during this period, and new mines and projects put on hold because of current low prices are expected to be commissioned. Mine production is projected to be around 1.7 million tonnes in 2014 as new mines and expansions to existing projects continue to be completed.

Importantly, outside China, approximately 470 000 tonnes of capacity is currently planned to commence production between 2009 and 2015, of which only 23 000 tonnes are from sulfide ores, with the remainder from laterites. Significant difficulties continue to hamper laterite projects and there are high costs associated with developing these projects and processing ores. As a result, if prices continue to fall or do not recover as is currently forecast, many of these projects would likely be further delayed or cancelled.

Refined nickel production is forecast to follow changes in nickel mine production, with producers developing integrated projects including both mines and refineries, or negotiating agreements with existing refineries to expand capacity in line with any new mines or developments. Refined nickel production is projected to grow at an average rate of 4 per cent a year over the medium term, to reach 1.54 million tonnes in 2014.

Nickel laterite projects

Nickel is found predominantly in two types of ore bodies: sulfides and laterites. Sulfide deposits tend to occur deeper below the surface, where nickel occurs as the compound (Ni, Fe)9S8. Laterite deposits occur closer to the surface, where nickel occurs in oxide compounds (limonites) and silicate compounds (saprolites).

It is estimated around 70 per cent of the world’s nickel resources are contained in laterite ores, yet laterites account for only 45 per cent of the world’s annual nickel production. This is because nickel sulfides are easier to process and cost less to develop, despite being more difficult to access because of their depth. The development of nickel laterite projects has continued to be high cost and technically difficult despite significant research and development during the past 25 years.

Nickel sulfide ores are converted to nickel metal using conventional flotation and pyrometallurgical processes. The ore is crushed, ground and undergoes flotation before being smelted to produce nickel matte, usually around 75 per cent nickel. The matte is then further refined either by leaching, roasting or electrorefining.

There are two processes by which nickel laterite ores can be converted to metallic nickel: pyrometallurgical and hydrometallurgical.

Pyrometallurgical processes

Pyrometallurgical processes (smelting) are more suited to processing saprolite (high clay content) than limonite (high iron content) ores. The process is energy intensive because the ores must be completely dried before they can be processed to prevent steam building up during the smelting process and becoming a safety risk. Typically, ferronickel or nickel matte are produced as the end nickel product. Ferronickel can sometimes be used as a direct input into stainless steel without further processing, however nickel matte must undergo leaching, roasting or electrorefining as occurs in sulfide processing.

Hydrometallurgical processes

Hydrometallurgical processes (caron process and leaching) are also energy intensive because the ores need to be partially dried before the rest of the process can begin. However, once the ores are dried, the processes tend to rely on chemical activity such as leaching solutions (acid, ammonia) at various temperatures and pressures, rather than smelting in furnaces at high heats. These processes usually produce nickel metal, of varying purity, as the end product. The main problem with hydrometallurgical processing is the lower rate of nickel recovery. Typically, maximum economic recovery is around 80 per cent. As a result, ores need to have a relatively higher grade for these processes to be economic.

Irrespective of the method used to process laterite ores it is more expensive both in terms of capital costs and marginal costs than for sulfide ores. In addition, each ore is unique (different clay contents etc) because of the leaching process by which laterites form, so technologies must be altered with each deposit.

In the past decade, a number of nickel laterite projects developed have encountered problems. In Australia, Anaconda, now Murrin Murrin, was largely rebuilt before operations became profitable, while Ravensthorpe recently closed because of difficulties achieving planned production rates. Ravensthorpe’s delayed timing resulted in production starting in a period of falling prices, at the same time as development costs doubled to US$2.2 billion.

Of the 12 nickel projects outside China currently scheduled to commence before 2015, only two are sulfide projects, accounting for around 5 per cent of the total planned capacity. As a result, laterite production is expected to become relatively more important to world nickel output. For these projects to remain economic and nickel production to increase, prices will need to remain high enough to cover the costs of these projects.

Australian production to increase steadily from 2010-11

As a result of the recent rapid decline in world nickel prices, a number of Australian producers have reduced output or closed mines. Most cuts have occurred at smaller operations producing less than 6000 tonnes of nickel in ores and concentrates a year.
In mid-January 2009, BHP Billiton announced its Ravensthorpe nickel operations (capacity of 50 000 tonnes a year) would be shutdown because of the poor outlook for nickel and continuing difficulties with the project, indicating larger operations are under pressure as well as smaller ones.

Since August 2008, 11 Australian nickel mines, with combined production capacity of around 105 000 tonnes of nickel a year, have been placed on care and maintenance either wholly or partially as a result of unfavourable market conditions. OZ Minerals’ closure of the Avebury mine in Tasmania follows only six months of production.

In January 2009, BHP Billiton announced operations at Ravensthorpe would be closed and mining at Mount Keith scaled back. The relatively high cost and technical challenges of processing laterite ores and the significant fall in the nickel price have made Ravensthorpe uneconomic. Operations began in December 2007 and were expected to continue for around 25 years.

Following closures equivalent to capacity of more than 100 000 tonnes of nickel a year, Australia’s mine production is forecast to decline by around 8 per cent in 2008-09, to 174 000 tonnes. Production from Ravensthorpe prior to its shutdown, as well as increased output from Panoramic Resources’ mines and Western Areas’ Forrestania project, are expected to partially offset lower production elsewhere as a result of mine closures during the financial year.

The full effects of lower production and mine closures are not expected to be felt until 2009-10, when production is expected to decline by a further 20 per cent, to 140 000 tonnes.

By 2013-14, Australia’s nickel mine production is projected to increase to around 180 000 tonnes a year as producers respond to higher nickel prices from 2011 onward. These high prices are expected to make production at many idled mines economic and to result in the development of projects.

Refined production lower as a result of disruptions in Western Australia in 2008-09…

Australia’s refined nickel production is forecast to decline by around 17 per cent in 2008-09. Reduced supplies of gas in Western Australia as a result of a fire at Varanus Island in June 2008 disrupted nickel smelters and refineries in that state in the September quarter. In addition, BHP Billiton’s rebuild of the Kalgoorlie smelter during the September quarter 2008 reduced feed available to the Kwinana refinery. Mine closures are also expected to contribute to lower refined production as less feed is processed.

…but to increase over the medium term

Refined production is expected to recover to around 108 000 tonnes in 2009-10 as fewer production disruptions are anticipated. However, refined production is not forecast to recover fully until mine production responds to higher world nickel prices. By 2013-14, Australian production of refined nickel is projected to return to around 126 000 tonnes.