Bloomberg News

Pig Iron’s Pain Proves Boon for Nickel Miners: Commodities

October 27, 2011

(For more commodity columns, click CMMKT.)

Oct. 27 (Bloomberg) -- Nickel, the second-worst performing metal on the London Metals Exchange in the past six months, is set to rebound as Chinese steelmakers lead a recovery in demand.

Nickel’s 20 percent slump this year has made it cheaper than pig iron, a substitute made from low-grade ore from Indonesia and the Philippines. Nickel, used to strengthen stainless steel in everything from kitchen sinks to aircraft- fuel tanks, may rise 16 percent next year as mills boost purchases, Societe Generale SA said.

Baosteel Group Corp., China’s biggest publicly traded steelmaker, said it may start buying more refined nickel this month because pig iron has become too expensive. That will boost profits at nickel miners including BHP Billiton Ltd., Vale SA and OAO GMK Norilsk Nickel, the world’s largest producer.

“We have seen less nickel pig iron production, which is the most flexible part of the nickel output,” Anton Berlin, head of marketing at Norilsk Nickel said in an Oct. 21 interview in Moscow. “If the price stays low, we’ll probably see further shutdowns.

About ten percent of all nickel producers are not making profit on production at current prices, he said. Nickel for delivery in three months last traded at $19,808 a ton.

Prices, which reached a year-record of $29,300 a ton in February, may average $22,937 a ton next year, according to the median of 20 analyst forecasts compiled by Bloomberg. It may rise to $23,380 a ton in 2013 and $24,000 a ton in 2014.

‘‘Both stainless steel demand and the substitution between nickel pig iron and primary nickel suggest that there will be higher prices for nickel,’’ said Jeremy Friesen, a commodity strategist at Societe Generale in Hong Kong. Nickel may reach $23,000 a ton next year, he said.

Forecasts Raised

Credit Suisse AG last month raised its nickel price forecast for next year by 5 percent, 18 percent in 2013 and 28 percent for 2014, citing the rising cost of Chinese nickel pig iron, the failure of some new projects outside China to meet delivery targets and the redressing of excessive production of stainless steel in China.

Beijing Antaike Information Development Co. and Mysteel.com trimmed their pig iron forecasts this month for output from China, the biggest producer, by as much as 12 percent for 2011 to 240,000 metric tons. Nickel fell 39 percent from a February high to this year’s low of $17,600 as investors concern that a global economic slowdown would curb metal demand.

‘‘Nickel prices below $20,000 a ton would attract usage of the metal,’’ said Antaike analyst Fan Runze. ‘‘The prices are forcing some pig iron producers to cut output and users to restart purchasing.’’

Halted Production

Production of high-grade nickel pig iron may have been cut by a quarter at Chinese provinces including Inner Mongolia and Shandong after steelmakers increased purchases of refined nickel, Mysteel.com analyst Wang Chunfang said. Inner Mongolia Lutai Specialty Steel Co., the province’s second biggest pig iron producer, has delayed starting up two new production lines because of the slump in orders.

‘‘We’ve halted our only production line of nickel pig iron earlier this month because we incurred losses in the production,” Zhou Wenbiao, an official at Inner Mongolia Lutai Specialty Steel said by telephone from Ulanqub, Inner Mongolia. “We’ve halted purchases of laterite ore for a while. We are very free now, we have nothing to do.”

Production Spree

China’s imports of laterite ore, the raw material to make nickel pig iron, reached 26.5 million tons in the first eight months of this year, exceeding the 25 million tons for all of 2010, following a production spree of the nickel alternative, according to Antaike.

China produced 165,000 tons of pig iron last year, up from 90,000 tons, according to the International Nickel Study Group. Output reached a monthly high in July this year and began declining in August, according to Antaike data.

“If the nickel price continues to trade at a low level, nickel pig iron production will be affected and we will adjust our forecast depending on market condition,” said Jim Lin, a Beijing-based senior consultant of steel and raw materials at CRU.

Stainless steel production in China, the world’s biggest producer, rose 6 percent to 3.37 million metric tons in the first nine months from a year earlier, according to the China Iron and Steel Association.

Stainless Steel

Output may rise 6.2 percent this year, Li Cheng, the honorary chairman of Beijing-based Stainless Steel Council, said Sept. 7. Global stainless steel output rose 3.8 percent to a record 16.4 million metric tons in the first half, the International Stainless Steel Forum said in a report last month.

Still, the International Nickel Study Group warned last month that global nickel production may exceed demand by a wider margin next year than in 2011. Output may rise next year to 1.74 million metric tons from an estimated 1.6 million in 2011, the group said. While usage will increase in 2012 to 1.67 million tons from 1.57 million this year, it said. Based on those estimates, the surplus would increase to 70,000 tons from 30,000.

Investors should buy nickel for three-month delivery on the London Metal Exchange after global recession fears have “hit” prices, Societe Generale said this month, while Zug, Switzerland-based Tiberius Asset Management AG said nickel was a preferred investment, citing the marginal cost of production.

Baosteel may not buy any pig iron this month because nickel is cheaper, Metal Bulletin reported this month, citing an unidentified official.

--Michelle Yun, Helen Yuan, with assistance from Ilya Khrennikov in Moscow. Editors: Rebecca Keenan, Keith Gosman

To contact Bloomberg News staff for this story: Michelle Yun in Hong Kong at myun11@bloomberg.net; Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net


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