It is unlikely the markets will ever see $20-per pound nickel again now that China can produce nickel pig iron at single digit costs, says Jim Lennon, executive director in commodities research with Macquarie Bank Limited in London.
During the height of the nickel glut, China could not purchase enough of the mineral for their booming stainless steel and alloy producers. Their solution was to process low grade nickel ore from the Philippines and Indonesia in reopened blast furnaces that were shut down for environmental reasons, Lennon said. The ore when combined with coke results in nickel pig iron. Nickel pig iron has been around for 100 years, but the Chinese developed a cost effective product that superseded nickel's high price on the global market.
As a cheaper alternative, pig iron has become primary nickel's competitor.
In 2005, the cost of producing nickel pig iron was extremely high, between $10 and $15 (US), said Lennon, who researches equity markets on the London Metals Exchange.
Looking at the $20-per pound high grade nickel alternative, "it kind of made sense."
Between 2006 and 2007, the Chinese were starting to use coal-fired electric furnaces which lowered their cash cost of production to about $5,000 a ton, Lennon said.
Another incentive came when global steel demand brought on record high iron prices in the first half of 2008. This was a significant benefit to China since iron is a byproduct of nickel pig iron processing. It allowed China to further offset production costs by $5-to-$7-per pound. At the same time, blast furnaces were being replaced by nickel plants (refineries) with much lower electricity consumption and much higher efficiency.
With all the new incentives, China managed to further reduce cash costs to $7-to-$8 per pound by the middle of this year.
Since September however, nickel prices have gone below that price. Iron scrap has collapsed and coke fell from $400 to $200. The only cost that has stayed the same is electricity.
"With nickel prices at $6-per pound pretty much everyone in China is losing money," Lennon said.
In the first six months of the year close to 60,000 tons of nickel pig iron was contained. However, the second half is likely going to be 20,000 to 30,000 tons.
Over 100 furnaces in China were producing nickel pig iron earlier this year. Now, they are lucky if 10 are in operation, Lennon said.
Production this year was up to 90,000 tons, up 10,000 from last year. The new year is not expected to produce more than 40,000 tons, Lennon said.
China imported about 15 million tons of low grade nickel ore last year from Indonesia and the Philippines. Approximately eight million is now stockpiled at the port, Lennon said.
Even though nickel pig iron is a slightly inferior product than primary nickel, it can be manufactured into alloy products with little difference, Lennon said.
So, what once was a plug-in product to fill the gap of low supply and exorbitant nickel prices is now an alternative to replace nickel when pricing becomes too inflated.
This places a ceiling on Sudbury Basin mining companies' products.
For primary nickel producers it means the price will not exceed $8 a pound in the future, said Lennon.
"It acts as a ceiling on prices above $8 in the future due to the ability to add supply quickly and cheaply," Lennon said.
In effect, "we have seen the last of inflated prices since there is enough capacity planned to meet expected demand growth in the coming years."