THE SHORTAGE OF NICKEL

THE SHORTAGE OF NICKEL
Raymond J. Goldie
Salman Partners Inc.
Toronto
PDAC March 2004
ABSTRACT
Over the next two or three years, China’s economic boom and the West’s concerns about
public hygiene are likely to support continued strong growth in the world’s demand for
nickel. The shape of nickel’s pinch-pointTM curve suggests that even a prolonged period
of high prices would do little to dampen demand.
Can the world satisfy its growing need for nickel?
What is most important on the supply side is that which is not likely to happen. No big
new mines will come on stream before the second half of 2006. We are not likely to
flooded with surplus nickel, as happened after the collapse of the Soviet Union in the
early 1990’s. Nor are we likely to be putting our faith in new technologies, as many of us
did in the late 1990s when the Australians were building their laterite projects. And even
if we were to discover a big new deposit of nickel, recent history suggests that it would
take at least seven years to prove up, permit, finance and construct.
We are likely to see modest increases at existing operations, and Inco’s Voisey’s Bay and
Goro projects and a few other projects of similar size should come on stream between
2006 and the end of the decade. Furthermore, four hydrometallurgical processes are
currently being developed in order to treat lateritic nickel ores: we suspect that at least
one of them will find commercial success. Even so, it is difficult to see how the nickel
industry will be able to fill the gap between the demand for its product and what it can
supply.
There is a chance that geologists can help to fill the gap. The world’s existing nickel
operations have bottlenecks at the mine level, while smelters and refineries are running
below capacity. New discoveries at existing mines are probably our only chance to keep
these smelters and refineries full. The most likely alternative is that producers will be
forced to ration the nickel which they allocate to their clients.
“pinch-pointTM” is a trademark registered to Raymond Goldie
MAIN TEXT
Good morning, ladies and gentlemen. I’ll start with a little of the social history of nickel.
Let me take you back 10 or 15 years to the late 1980s and early 1990s. At that time, we
saw an increase in the public’s worries about the dangers of germs. People were growing
more and more concerned about AIDS. Lucien Bouchard lost his leg and Muppeteer Jim
Henson his life to antibiotic-resistant superbugs. Books and movies dealt with gruesome
plagues like Ebola. Diners stopped sharing utensils. “Seinfeld” portrayed the urban angst
visited upon on a pizza maker who didn’t wash his hands after visiting the bathroom, and
on a chip eater who dipped again in the communal bowl after already having taken a bite.
Demand for Lysol, which was traditionally a down-market product, soared when its
manufacturer introduced an anti-bacterial version. Sales of bar soap plummeted; sales of
soap pumps soared.
And stainless steel began a massive invasion of the domestic kitchen.
What are the first words you think of when you think of stainless steel? For many
people, the answers are words like “cleanliness”, “hygiene”, “surgical sterility”.
SLIDE – stainless steel
Stainless steel is the single major end-use of nickel, accounting for about two thirds of
total consumption. Although I will not give microbe mania all of the credit for having
increased the Western world’s growth in consumption of nickel from 3.5% pa in the
1980s to 5.6% in the 1990s, it was a factor.
The last few years have been a little like the late 1980s and early 1990s. There has been a
resurgence in concern about public hygiene, prompted by outbreaks of SARS, West Nile
virus, Norwalk virus and bird flu. These concerns should ensure that stainless steel
kitchens are not a short-lived fad like the Avocado and Harvest Gold appliances of the
1970s. Stainless should continue to move down-market, and it should continue to replace
plastics, ceramics, mild steel and brass. Over the next ten years, we may even see
stainless steel invade the domestic bathroom.
SLIDE – stainless toilet
In the nickel markets of the next 2 or 3 years, demand from China will be even more
important than our growing fear of germs. Like Pat Mohr, whose speech kicked off this
convention, and so many speakers since, I can’t overstate China’s importance. According
to Inco, China’s consumption of nickel is growing at over 20% per annum.
SLIDE – China
In 2003, ¾ of the world’s growth in nickel consumption came from China. In terms of
actual tonnages, China’s consumption of stainless steel grew from 0.2 million tonnes in
1990 to 4.5 million tonnes in 2003, when China accounted for 20% of the world’s
consumption of stainless steel. That figure is likely to continue to increase. China
consumes about 3 kg of stainless steel per capita per year. For comparison, Korea
currently consumes about 21 kg per capita per year and Taiwan, 25.
Now, I concede that there are valid concerns about China’s frail financial system, about
shortages of electricity and about an economic hangover after the 2008 Olympics, but I
suspect that China will follow Japan’s path, and enjoy several more decades of sustained
strong growth.
In 2003, global demand for nickel grew at about 7%. I anticipate that potential demand
will continue to grow at at least this rate.
Turning to the supply side, until Voisey’s Bay nickel reaches the market in the second
half of 2006, no big new mines will come on stream. Between now and 2006, expansion
at existing operations should add about 5% per annum to global supply of nickel.
And the gap between demand and supply? Today, the world’s demand for nickel exceeds
production by about 6%. That gap seems likely to widen because, as we’ve seen,
potential demand is growing at 7% per annum whereas production is growing at only
about 5% per annum. How can we fill this growing gap? We can’t do it out of
stockpiles, because producer plus LME inventories are close to record lows. The only
possibilities seem to be massive substitution of other materials for nickel; finding new
sources of supply; or rationing. I’ll look at these alternatives in a moment. But first, I’d
like to make two points. The first is that, because rationing is a real possibility, I’ve been
careful to talk about future growth in potential demand, rather than actual consumption of
nickel. Secondly, we should consider how we got into a situation where we face several
years of severe shortages of nickel.
Actually, the nickel supply situation is an extreme version of the situation facing all base
metals, in which mines are the bottleneck while smelters and refineries are running short
of feedstock. Here’s why mines are the bottleneck. Does anyone know the life of the
average base metal mine? I’ll be honest, I don’t. But let’s guess. Let’s say it’s 20 years.
That would mean that, every year, on average, 1/20 of the world’s mine capacity gets
used up. 5%. If the world doesn’t find and develop 5% new reserves every year, mine
production must fall. So, in a period of underinvestment in base metals, mine capacity
will fall while smelting and refining capacity remains roughly steady. This makes
smelters and refiners increasingly desperate for feed. Two previous speakers at this
convention have referred to the most recent manifestation of this situation. There have
been recent transactions in the copper concentrates market in which the smelting and
refining fees charged were negative. Never before have miners had smelters pay them
for the privilege of treating their output! The moral of the story is that, after a long
period of underinvestment, investors in metals stocks should favour miners over smelters.
There are 3 reasons why nickel has been hurt more by underinvestment than have other
base metals. Firstly, the collapse of the former Soviet Union opened the floodgates in the
early to mid-1990s.
SLIDE – Russian nickel
The former Soviet Union exported to the West massive quantities of fresh nickel,
stockpiled nickel and scrap nickel. No-one in the West knew the size of the flood, nor
when it would end, and investors became unenthusiastic about big new Western nickel
projects.
Secondly, in March 1996, Inco announced that it expected to bring Voisey’s Bay into
production as early as 1998, and that Voisey’s Bay would produce 122,000 tonnes of
very cheap nickel per year.
SLIDE – Voisey’s Bay
122,000 tonnes would have been equivalent to 14% of the western world’s annual
consumption of nickel at that time, so most of Inco’s competitors were dissuaded from
bringing new mines into production – most competitors, that is, one exception being a
man called Andrew Forrest in Western Australia. Mr. Forrest has earned the reputation
of being a force of nature. When his joint venture partner assigned one of its executives
to “shadow” him, the Aussies speculated that to shadow Mr. Forrest he’d need a mighty
big umbrella, perhaps a circus tent! Mr. Forrest’s charm was able to convince some
investors and bankers that the application of new technologies to laterite deposits would
allow Australia to flood the world with cheap nickel.
The Russians have sold off their stockpiles. Politics and the realities of northern
construction delayed and shrank Voisey’s Bay. Mr. Forrest’s Murrin Murrin project
never did live up to his expectations. But we are still haunted by the effects that these
events have had on nickel production.
One way to address the shortage of nickel could be by substitution of other materials.
Let’s look at what history tells us about substitution. In the 24-month period 1988 to
1989, which saw the last spike in nickel prices, nickel averaged US$6.17 per pound. Inco
has analyzed this period, and found that substitution affected only the alloy steel and
plating businesses. Other applications of nickel, notably stainless steel, increased over
1987’s level.
SLIDE – pinch-point chart
As this chart shows, once nickel inventories are below 50 days’ consumption, the
relationship between prices and inventories is vertical, implying that nickel demand is
price inelastic, and that price increases result in little substitution.
Another way to address the shortage of nickel could be for the geologists amongst you to
make a sparkling new discovery. Unfortunately, it’s unlikely that a major new deposit
could fill the gap before the end of 2006. The last 15 years have taught us that to prove
up an orebody could take two years, permitting could take another two or three years and
construction another three or four years.
SLIDE – big new discovery
But there is a chance that geologists can help to fill the gap. Because the world’s nickel
mines are running flat out, while smelters and refineries are operating below capacity,
new discoveries at existing mines are probably our only chance to top up these smelters
and refineries.
The alternative - and the only way I see to avoid it is to have a big bad recession between
now and 2006 - the alternative will be for producers to ration their clients’ allocations of
nickel.
SLIDE –rationing
Some of this rationing could be inadvertent – such as when a stainless steel producer
recently went on strike – but a formal rationing process is likely.
Fortunately for the global economy, I do not think we’ll see rationing of most other
metals. With the possible exception of uranium, no other metal suffered as many
disincentives to investment in the 1990’s as nickel, no other major metal enjoys nickel’s
rates of growth in demand, and the demand for no other metal is as inelastic as that of
nickel.
Looking beyond 2006, I’ve already made one forecast: that stainless steel will invade the
domestic bathroom. Here’s a second forecast. I predict that at least one new application
of hydrometallurgy to the extraction of nickel will achieve commercial production within
ten years.
Hydrometallurgical processes have had a bad press. But, despite the crashing
disappointments of the Australian laterite projects, the mining industry is taking another
hard look at hydromet. After all, Murrin Murrin may yet produce, using hydromet, at a
rate of 40,000 tonnes of nickel per year, with costs of US$2.50 per pound.
In freshly uplifted, unweathered ophiolite belts, such as those of New Zealand’s South
SLIDE – N.Z.
Island, nickel is trapped in the crystal lattices of olivine. The energy required to liberate
nickel from olivine is much greater than the energy required to liberate nickel from
sulphide minerals. As a result, the bulk of the world’s nickel comes from sulphide ores.
No commercial process has ever been developed based on nickel in olivine.
Laterite nickel projects are usually based on ophiolites which have been weathered in a
tropical environment. Water, oxygen and time have liberated nickel from its olivine
cage. Within a few metres or tens of metres of the surface of a lateritic deposit, nickel
tends to occur as oxides (the “limonite zone”). Between the oxide zone and the
unweathered ophiolite bed-rock at depth, nickel occurs mostly within clay minerals (the
“saprolite zone”).
The energy required to liberate nickel from oxides and clays is less than that for olivine,
but more than that for most sulphide minerals. There is a variety of techniques for
extracting nickel from laterites. In general, though, what works for limonite zones does
not work for saprolite zones, and vice versa.
The biggest challenges in processing nickel laterites are usually:
(a) the cost of the energy required to liberate the nickel;
(b) the need to separate limonite from saprolite;
(c) the need to deal with material high in unwanted constituents, such as magnesium;
and
(d) the recovery of the cobalt that usually accompanies nickel in laterites.
SLIDE – is there hydromet?
SLIDE – key?
Five public companies - and there are others - are working on hydrometallurgical
processes to be applied to new nickel laterite projects.
SLIDE – potential technologies
If any of them were to be successful, they should increase the range of deposits which
geologists could look for. For example, the Jaguar Nickel, Goro and Weda Bay processes
all contemplate the ability to treat both limonites and saprolites. Jaguar’s process will
also be designed to deal with a high level of magnesium.
SLIDE – summary
The next ten years should be exciting ones for the nickel industry: new applications of
nickel, new sources of nickel. But the next 2 to 3 years could be scary as we are forced to
deal with rationing.