June 09, 2008

Demand decline to curb Chinese nickel pig iron output

Analyst said that the outlook for nickel is not quite as firm but prices should still hold around current levels. According to analyst, production cuts by stainless steel producers, the biggest consumers of nickel, as well as high stainless steel stocks have weighed on prices much longer than expected.

But with prices now down 25% since the start of May to just above USD 22,000 per tonne, nickel pig iron producers in China are struggling to remain profitable, faced with a double whammy of falling metal prices and sharply higher costs for coking coal.

Macquarie Research in a report earlier this week said that this is especially so for those using blast furnaces instead of electric arc furnaces, which have higher input costs for coke. It said that coke prices have more than doubled in the past nine months. Macquarie in its report said that "We hear that more than half of the blast furnace operators in Shandong, Henan, Shaanxi and Hebei area have closed their plants, especially those that produce lower grade products.”

Mr Malcolm Southwood Goldman Sachs metals analyst in Melbourne said that the fall in prices has mostly affected producers using very low grade ores, which have piled up at some Chinese ports and will likely be difficult to place going forward. Mr Southwood said that some producers, though, have begun importing higher nickel content ore from Indonesia, rather than relying on lower content ore from the Philippines. He added that "The Chinese are importing better quality ore, which means costs are falling. Chinese marginal cost of production is probably a little bit below where we are now, leaving some room for prices to fall further.”

Chinese nickel pig iron production first emerged in 2006 and was quickly ramped up as prices soared to a record USD 51,800 per tonne. The industry delivered about 100,000 tonnes of contained nickel last year, making it a key swing producer of the stainless steel ingredient. But as prices escalated, so did costs for new producers who assumed the high prices will stay longer.