THE PIG IRON FACTOR
Citigroup worries about sharp correction in nickel price Citigroups
equity research unit Tuesday expressed worry about a sharp correction in nickel
prices, calling the supply demand situation an accident waiting to happen.
Author: Dorothy Kosich
Posted: Wednesday , 06 Jun 2007
RENO, NV -
While Citigroup has increased its long term nickel price projection from $4/lb
to US$6/lb, metals analysts Alan Heap and Alex Tonks termed the supply-demand
situation "an accident waiting to happen."
Noting that "nickel prices have been resilient under an accumulation of
bearish news, supported by a short squeeze," the analysts declared that they
don't believe "these conditions will last. A combination of increasing supply
and demand destruction will bring a sharp correction in prices."
In their analysis published Tuesday, Heap and Tonks expressed concerns that
the nickel market is "unstable, and prices could halve over a few months when
the fundamentals begin to bite."
Nonetheless, Citigroup also forecasts that primary nickel demand in the major
consuming economies will increase 10%, while global demand will rise 8%.
Several factors could harm primary demand, however, including stainless
destocking, substitution of high nickel alloys, and substitution of primary
nickel by scrap.
Although LME nickel stocks have doubled from their April low point, Citigroup
noted that "total reported stocks remain low and the market is still
fundamentally tight."
Meanwhile, they also asserted that "the surge in production of nickel in pig
iron presents an important source of new supply and one of the most important
threats to the sustainability of high prices." Their research determined that
New Caledonia exports are displacing Philippines ore for nickel in pig iron
production.
"Production of nickel in pig iron reached 30kt of contained Ni in 2006, up
from virtually zero in 2005," Heap and Tonks wrote. "We now estimate that
production in 2007 will be around 70kt, and by year end running at 100ktpy." In
the meantime, pig iron capital costs are almost zero although producers may be
required to produce a higher quality product, they suggested.
Citigroup estimated pig iron operating costs to average US$8-$12/lb.
Among the factors which could cause a sharp decline in the pig iron production:
A fall in the nickel price
Environmental problems involving mines in the Philippines and at blast
furnaces
Governments may restrict or ban the export of nickel ores. "This seems
highly likely and such proposals have already been made in Indonesia and New
Caledonia."
In contrast to the supply outlook for other base metals growth, "growth in
nickel supply will be determined by the outlook for a few major projects,"
Citigroup suggested.
Citigroup's analysis asserts that barriers to nickel entry into commodity
markets are increasing. "Most of the new supply will be from laterite projects
[accounting for more than 90% of new supply] which are expected to face high
capital costs and technical challenges."
Capital costs for new laterite projects average US$11.33, sulphides US$4.50,
according to Citigroup.
"The cash cost curve is expected to continue to steepen on a trend basis, and
industry average cash margins to widen as a consequence," the analysts
predicted.
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