The world nickel market is currently in oversupply as demand has crashed in response to the Global Financial Crisis. This crisis has seen industrial production decline, resulting in massive stainless steel production cuts of a scale not seen since the 1970’s. This has a major effect on nickel demand, as it is an essential ingredient in stainless steel.

The current oversupply is a significant change from the period 2003-2007 when world industrial production growth averaged around 4% per year, propelled in no small part by the rapid development of China which enjoyed growth rates of over 16% per year during this period. Demand for stainless steel and nickel exceeded producer expectations.

The nickel supply side was slow to react as existing producers were running at full capacity with no margin for supply disruptions. New nickel projects take four to ten years to come to market and are proving increasingly difficult and expensive to build and commission. Producers are challenged by high capital and operating costs at the same time as being forced to move away from the fast diminishing, higher grade sulphide deposits to laterites which lack
competitive processing technology and suffer from a high capital cost that is a barrier to entry for smaller deposits and owners with limited access to capital. Suppliers are experiencing major cost blowouts and long construction and ramp ups from conventional HPAL an FeNi smelter projects.

Three new operations Ambatovy in Madagascar, and Goro, and Koniambo in New Caledonia are presently under construction bringing around 180,000t to market while 380,000 tpa has been taken off the supply side.

The most rapid reaction by nickel suppliers came in the advent of Chinese nickel pig iron (NPI) production, using idled blast furnaces to produce a very low quality product through a very energy intensive, polluting and costly process. Initial costs of production at $12-15/lb of nickel could be supported during the peak of the cycle. Since then, the cost of some Chinese NPI has fallen to around $6-8/lb as efficiency gains, declining coke prices and iron credits have been factored into the cost structure. However, the NPI producers still represent the highest cost nickel producers.

Substitution became an issue at record high prices and when supply simply could not meet demand. But nickel’s unique properties are proving that substitution will be difficult and delayed where corrosion properties are specified.

The major decline in stainless steel production led to a large oversupply of nickel, and corresponding fall in nickel prices. Prices fell from a high of US $25/lb in 2007 to a level of US$4/lb in Feb 2009 and US$8/lb in Oct. At US$6/lb prices around 20% of the global nickel industry is operating at a loss.

In the longer term, developing world demand growth, particularly the growth of China and India, should help drive extremely strong growth rates, and a situation of improved nickel demand should re-emerge.