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A look at nickel price bubbles and ferronickel pricing
Robert Cartman, Consultant, Hatch
November 2010November 2010
2
�Hatch and Hatch Beddows
�Should we be expecting another nickel bubble?
�Conclusions
�A brief look at ferronickel pricing
Contents
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
SERVICES
SECTORS
HATCH
Hatch services and sectors
© Hatch Associates Limited, 2010
HATCH
Global reach and resources
Canada• Calgary, Alberta• Hamilton, Ontario• Montreal, Quebec• Sorel-Tracy, Quebec• Sudbury, Ontario• Mississauga, Ontario• Niagara Falls, Ontario• Vancouver, British ColumbiaUSA
• Boston, Massachusetts• Buffalo, New York• Millburn, New Jersey• Monroeville, Pennsylvania• New York, New York• Pittsburgh, Pennsylvania• Pleasanton, California• San Francisco, California• Seattle, Washington
3400
South America• Antofagasta, Chile• Santiago, Chile• Lima, Peru• São Paulo, Brazil• Belo Horizonte, Brazil• Vitoria, Brazil
700
Europe• London, England• Moscow, Russia
170
South Africa• Johannesburg• Richards Bay
600
India• Delhi
China• Beijing• Shanghai
120
Australia• Brisbane• Gladstone• Mackay• Melbourne• Newcastle
• Perth• Sydney• Townsville• Whyalla• Wollongong
2300(Yellow indicates regional hub)
8000 people
© Hatch Associates Limited, 2010
5
Hatch counts many of the world’s major mining and steelmaking companies
and financial institutions among its core client base
Mining
Alcan
Alcoa
Anglo American
Assmang
BHP Billiton
De Beers
ENRC
Falconbridge
Impala Platinum
Lonmin
Newmont Mining
Norilsk
Placer Dome
QIT
Rio Tinto
SUAL
Vale Inco
Xstrata
Steel
ArcelorMittal
BlueScope Steel
Celsa
CMC
Tata/Corus Group
Evraz Group
Gerdau Group
Mechel
Metalloinvest
Metinvest
Nucor
POSCO
Ruukki
Severstal
Shougang
TMK
U.S. Steel
voestalpine
Financial institutions
ADB
Bank of America
Bear Stearns
CIBC
Citibank
Commonwealth Bank
Credit Lyonnais
CSFB
Deutsche Bank
EBRD
HSBC
IFC
JP Morgan Chase
Mellon Bank
NM Rothschild & Sons
RBS
UBS Warburg
World Bank
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
6
�Hatch and Hatch Beddows
�Should we be expecting another nickel bubble?
�Conclusions
�A brief look at ferronickel pricing
Contents
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
7
Two price bubbles in Ni stand out from recent times – that of the late
1980s and that of a couple of years ago
Source: MB, Wood Mackenzie, Hatch Beddows
LME Ni price vs. cost of production ($/tonne)
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0
10,000
20,000
30,000
40,000
198219
83198
4198
519
8619
87198
8198
919
9019
91199
2199319
94199
5199
6199
719
98199
920
0020
01200
220
0320
0420
05200620
0720
08200
9
Average LME Ni price
Average marginal cost of production
8
The Ni bubble of 2007 was fuelled by a number of factors though the
bubble itself was a result of speculative buying and ‘herd mentality’
Source: MB, Hatch Beddows
LME Ni price ($/tonne) Drivers of short-term Ni price
� Supply / Demand balance
� Stockpiles, strikes, natural disasters
� Stainless production, financial crises / recession
� Expectations
� Alloy surcharge mechanism
� Speculation
� Dollar weakness
� Against Ni-producing countries
� Input costs
� Oil price, sulphuric acid
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0
10,000
20,000
30,000
40,000
50,000
60,000
Aug
04Feb
05A
ug 05
Feb 06
Aug 06
Feb
07A
ug 0
7Feb
08A
ug 0
8Feb
09Aug
09
9
The supply / demand balance for nickel has an effect on nickel prices,
although recent years show that other factors matter
Source: MB, Hatch Beddows
Supply / Demand balance for finished Nikt
LME Ni price ($/tonne)
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0
10,000
20,000
30,000
40,000
50,000
60,000
Aug
04Feb
05Aug
05Feb
06A
ug 06
Feb 07
Aug
07
Feb 08
Aug 0
8Fe
b 09
Aug
09
-60
-40
-20
0
20
40
60
80
100
120
2004
2005
2006
2007
2008
2009
10
The weakening of the US dollar also pushes Ni prices higher
Source: Oanda, Hatch Beddows
Indexed dollar value vs. LME Ni price
0
20
40
60
80
100
120
140
Aug 0
4Ja
n 05
Jun
05N
ov 0
5Apr
06
Sep 0
6M
ar 0
7Aug
07
Jan
08Ju
n 08
Nov
08
Apr 0
9Sep
09
Mar
10
Aug 1
0
0
10
20
30
40
50
60
$ / RUB $ / CAD LME Ni (RHS)
$’000/tonne
Effect of $ weakness on Ni prices
� Priced in dollars
� No US production of Ni
� Ni Production in non-$ countries
� Ni Production in countries with ‘floating’ FX rate
� Dollar weakness
� Falling revenues for Ni producers
� Need to increase $ price of Ni to compensate
� Conclusion
� Visible correlation, r = -0.6
� Large movements driven more by short-term market conditions
Aug ’04 = 100
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
11
As a major component of production costs, the rise in oil prices over
recent years has also fed through to Ni prices
Source: Company reports, EIA, Hatch Beddows* via EAF
Ni mining and processing costs, 2009
0
20
40
60
80
100
120
140
160
Jan 01 Mar 03 May 05 Jul 07 Sep 09
0
10
20
30
40
50
60
Oil Ni
$/bbl$’000/tonne
Ni and oil price
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0%
20%
40%
60%
80%
100%
Russia Australia Canada Indonesia China NPI*
Fuel Labour
Maintenance / Overheads Raw materials
12
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2020
Long-term stainless steel production will move toward 40Mt by 2020.
Further substitution is possible but most of this has already taken place
Source: ISSF, Hatch Beddows
Stainless steel production
40%
45%
50%
55%
60%
65%
70%
75%
80%
2001 2003 2005 2007 2009
% 300-series
2020
300-series ratiokt
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
13
The next wave of investment could add more than 500kt of capacity
Source: Company reports, Hatch Beddows
28ktLateriteRavensthorpe
50ktSulphideTalvivaara
63ktLateriteGladstone (?)
46ktLateriteVermelho (?)
22kt
30kt
23kt
Laterite
Laterite
Laterite
Shevchenko (?)
Taganito
Tagaung Taung
31ktLateriteRamu
10kt (?)SulphideEagle (?)
Laterite
Laterite
Sulphide
Laterite
Laterite
Laterite
Laterite
Laterite
Laterite
Ore type
60kt
52kt
12kt
40kt (?)
60kt
60kt
23kt
36kt
60kt
Capacity
Koniambo
Ambatovy
Barro Alto
Fenix (?)
Goro
Nonoc (?)
Nunavik
Onca Puma
Weda Bay (?)
2013+201220112010
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
14
1,000
1,100
1,200
1,300
1,400
1,500
1,600
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Supply Demand
A small nickel supply deficit is expected for 2010 before a return to
surplus, assuming certain projects finally arrive
Source: Hatch Beddows
Supply and demand of finished Ni
forecasts
-60
-40
-20
0
20
40
60
80
100
120
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Supply / Demand balance for finished Ni
forecasts
kt kt
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
15
0%
20%
40%
60%
80%
100%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Sulphides Laterites
Nickel is increasingly being extracted from lateritic ores
Source: Vale, Xstrata, Hatch Beddows
Nickel production by ore type Nickel resources by ore type
Sulphides
27%
Laterites
73%
Sulphides Laterites
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
16
Laterite resources are mainly found in countries that require large
spending on infrastructure…
Source: BGS, Hatch Beddows
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
17
…and this drives up the cost of developing these deposits
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
Infrastructure
Power / Acid / Lime plants
TransportationRoad / Sea / Air
Conveyors / Pipelines
Difficulty of terrain / climate
Accommodation
Permits / Compensation
18
Summary of nickel ores and their pros and cons
Source: Hatch Beddows
Nickel ore
LateritesSulphides
• High mining costs
• Underground mining
• Low processing costs
• Proven technology
• Often associated with valuable by-products (Cu / Pd / Pt)
Limonites Saprolites
• Low mining costs
• Surface mining
• High processing costs
• Unproven technology
• Protracted startup
• Expensive materials of construction
• High acid consumption
• Low mining costs
• Surface mining
• Falling processing costs
• Proven technology
• Large-scale operations
• Vulnerable to energy costs
• Slag disposal
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
19
�Hatch and Hatch Beddows
�Should we be expecting another nickel bubble?
�Conclusions
�A brief look at ferronickel pricing
Contents
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
20
� Short-term – Higher Ni prices through 2010, falling thereafter
� Supply deficits for 2009 / 2010
� Stainless production to begin rebound in 2010
� New supplies to arrive, mainly from 2011
� Long-term – Rise in real prices but will it be temporary?
� Greater importance of laterites
� Rise in production costs
� Need for technological developments in processing limonites
Conclusions from 2009
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
21
� Nickel prices driven by a variety of factors
� Supply / Demand balance to become positive into 2011, assuming projects arrive
� The market is heavily driven by expectations
� Dollar weakness likely to persist or get worse = support for Ni prices
� Oil prices likely to increase = support for Ni prices
� Outlook
� Short-term – support for prices to remain above LT real average of $14-15k/tonne
� Possible impact from physically-backed ETFs
� Any bubble likely to be fuelled by new projects failing to meet expectations
� Long-term – Greater importance of laterites
� Rise in production costs
� Need for technological developments in processing limonites
� Need for different pricing of laterite-based products (e.g. FeNi) and scrap???
Conclusions for 2010
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
22
�Hatch and Hatch Beddows
�Should we be expecting another nickel bubble?
�Conclusions
�A brief look at ferronickel pricing
Contents
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
23
0%
20%
40%
60%
80%
100%
Ni metal Ferronickel Stainless scrap
Ni Fe Cr
Do FeNi and scrap suppliers need to push for more transparent pricing
on Fe units in their products?
Source: Hatch Beddows*Based on a Ni price of $20k/t, an Fe price of $300/t and a Cr price of $2250/t
Content of Ni-bearing materials by value*Typical percentage payable of
different metals in Ni-bearing materials
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0%
20%
40%
60%
80%
100%
Ni metal Stainless scrap Ferronickel
Ni Fe Cr
? ??
?
24
Scrap is supplied at a typical discount of 15% over equivalent primary
materials due to a variety of reasons
Source: MB, SBB, Hatch Beddows*18/8 solids delivered Europe**Equal to 18% Cr contract price, 8% LME Ni price and 71% shredded scrap price (Rotterdam fob)
Stainless steel scrap pricevs. price of component metals
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan
04Aug
04
Mar
05
Oct
05
Jun
06Ja
n 07
Aug 0
7Apr
08
Nov
08
Jun
09Feb
10
Sep 1
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
STS scrap* (LHS)
Sum of component material prices** (LHS)
Percentage of component prices achieved (RHS)
Stainless steel scrap prices
� Stainless steel scrap appears to be sold at a discount to the equivalent primary materials
� Average discount of ~16% since January 2004
� Why is scrap sold at a discount?
� Presence of residuals
� Not a homogenous product
� Can be awkward to handle and store
� Can damage EAF electrodes
� Can increase melting time
� Highly competitive industry
� Suppliers are price takers, not makers
$/t
25
Ferronickel is supplied at a typical discount of 5% on the equivalent
primary raw materials
Source: Company reports, EIA, Hatch Beddows*Based on Pamco FeNi (18.5% Ni, 75.5% Fe), Ni at 100% payable, Fe at 15% payable**Component prices are LME Ni and shredded scrap price (Rotterdam fob)
Calculated ferronickel pricevs. price of component metals
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Jan
04N
ov 0
4Sep
05
Jul 0
6M
ay 0
7M
ar 0
8Ja
n 09
Nov
09
Sep 1
0
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FeNi price* (LHS)
Sum of component material prices** (LHS)
Percentage of component prices achieved (RHS)
Ferronickel prices
� Ferronickel prices understood to be sold at a discount to price of the equivalent primary materials
� Ni units understood to be fully payable although not Fe units
� Fe not priced specifically – but how to price it?
� Instead, a premium is added onto the payable Ni, typically to cover transport costs
� Results in ferronickel producers supplying their products at a 2-8% discount to primary materials
$/t
26
Scrap is sold at a discount for a variety of reasons, yet these reasons do
not generally apply to FeNi – so why the discount?
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
� Presence of residuals – FeNi can contain Phosphorous/Sulphur/Silicon that may need to be reduced
� Not a homogenous product – FeNi supplied under guaranteed specifications
� Can be awkward to handle and store – FeNi a compact product
� Can damage EAF electrodes – FeNi has less risk of EAF damage
� Can increase melting time – FeNi a compact product
� Highly competitive industry – FeNi supply dominated by 7-8 global suppliers
� Suppliers are price takers, not makers – FeNi supply shocks do affect Ni price
�Does the discount exist because of uncertainty on how to price the Fe units? Iron ore, scrap, pig iron?
Reasons for discount on scrap prices and their applicability to FeNi
27
Hatch London office
Hatch is a member of the HATCH GROUP of companies
�
+44 7540080196Mobile
+44 20 7963 0972Fax
+44 20 7906 5119�
Consultant
Robert Cartman
+44 20 7906 5100 (switchboard)�
9 Floor, Portland House, Bressenden Place, London SW1E 5BH�
rcartman@hatch-europe.com
Your contacts for further information
METAL BULLETIN 26TH INTERNATIONAL FERROALLOYS CONFERENCE, 2010
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