Nickel costs rise as sulphur soars

Matt Chambers | July 08, 2008

COSTS at Australia's two biggest nickel mines, owned by BHP Billiton and Minara Resources, are expected to soar as Chinese demand for sulphur, a key input, pushes prices to a record.

BHP's newly commissioned Ravensthorpe mine and Minara's Murrin Murrin are both understood to need more than 400,000 tonnes of sulphur a year to make sulphuric acid used to break down laterite nickel ore.

Minara's bottom line is expected to be substantially hit by soaring prices when its half-year results are reported in August.

Sulphur prices have risen to about $800 a tonne, from an average of $400 in the first half of the last financial year and about $100 two years ago, because of surging Chinese demand for fertiliser and restricted oil refinery capacity in the Middle East. Sulphur is produced at refineries that process heavy oil such as some produced in the Middle East and that from Canada's oil sands.

On Friday, Minara warned investors of a sharp rise in sulphur costs in the past six months and said it did not expect the sulphur market to get back to a normal cycle until the second half of 2009. Some analysts are expecting it to take even longer.

Analysts responded by slicing their forecasts for Minara's full-year profit by more than 30 per cent, while the market took 16 per cent off the stock's price yesterday, sending it to $2.51, its lowest in nearly two years.

Goldman Sachs JBWere and UBS are each forecasting full-year net profit after tax of $124 million for Minara, down from $276 million reported the previous year.

Deutsche Bank went further, estimating sulphur costs will be the main contributor in reducing Minara's full-year profit to $50 million this year and next.

The bank forecast that Minara, which expects to produce between 31,000 and 35,000 tonnes of nickel this year, will continue to pay $600 a tonne to buy sulphur from Vancouver this financial year, plus about $200 a tonne in freight costs. "We forecast a total sulphur bill of $324 million in 2009, up from about $50 million in 2007," Deutsche Bank analyst Paul Young said.

Despite Minara saying it expected sulphur prices to return to normal, Mr Young said he thought prices would stay high for the next two-to-three years, partly because of refinery bottlenecks.

Increased domestic gas prices are also expected to hit the bottom line, but the main culprit will be gas.

BHP is in the process of ramping up production at its delayed Ravensthorpe nickel mine, which was started in May and has a nameplate capacity of 50,000 tonnes a year.

The company would not say what production has climbed to since commissioning, but acknowledged it was worried about the rising cost of sulphur.

"Because it is an important input, the recent increase in sulphur prices are of some concern and we will continue to monitor the market developments," a spokeswoman said.

Vale's yet-to-start Goro nickel mine in New Caledonia is also expected to suffer under rising sulphur costs.