Nickel

Markets

The nickel price experienced extreme volatility in 2008, peaking in March at $33,300 per tonne and then falling significantly in the second half due to deteriorating physical fundamentals, compounded by the rapid unwinding and deleveraging of commodity investments. In the second half of 2008, the nickel market was heavily impacted by the rapid deceleration of global industrial production.

Nickel cash prices fell steadily from the second quarter to a low of $8,810 per tonne in late October. LME cash prices averaged $21,104 per tonne for the year, a decrease of 43% over 2007.

Towards the end of the year, stainless steel mills cut production significantly in response to weakened demand that reflected widespread uncertainty over the global economic outlook. Demand from downstream metal consumers reduced and stocks were drawn down throughout the supply chain. Chinese stainless steel capacity utilisation remains low, although some previously idled production facilities were restarted in December. Material restocking in the stainless sector is now not expected until the second half of 2009. As a result of lower nickel prices, austenitic ratios have stabilised, following record nickel prices in 2007 which led steelmakers to switch production away from nickel-intensive austenitic steel grades towards ferritic grades.

Demand from non-stainless steel applications for nickel is beginning to be impacted by the global economic slowdown and orders from the aerospace and land turbine sectors are slowing. At the same time, scrap availability is relatively high.

However, the nickel industry’s supply-side response has been particularly rapid and significant. The curtailment or suspension of unprofitable operations has resulted in approximately 350,000 tonnes of refined nickel production being taken out of 2009 production, representing approximately 21% of the previously expected level of global supply in 2009. In addition, growth projects and exploration expenditure continue to be cancelled or deferred, introducing significant constraints to future supply. Nickel production from Chinese pig iron has now largely ceased, due to the impact of low metal prices on these high-cost producers. While the supply-side response continues to gain momentum, production curtailments in the fourth quarter were not sufficient to fully mitigate the impact of the sharp fall in demand. As a result, LME inventories steadily increased, finishing the year at 78,822 tonnes, a 64% increase over closing levels the previous year.

Outlook

The full impact of nickel production cuts is expected to stabilise the market in 2009. Supply from Chinese nickel pig iron and other high cost facilities is unlikely to resume given the prevailing economic climate and lack of visibility into near-term market conditions. If the weak pricing environment persists, further announcements of supply curtailments from industry participants can be expected. The closure of additional production facilities will tighten physical markets and prices are expected to be supported by the economic cash break-even costs of nickel producers. In the medium to longer term, the outlook is expected to improve as global demand recovers and the physical availability of nickel tightens.

The Nikkelverk refinery in Norway achieved a new record for nickel production in 2008. Matte from Sudbury, Canada, being unloaded at Nikkelverk’s dock. Yngvar Finne bags and seals the anodes used during the extraction process