Vale's Sudbury to Return to Nickel Production Easing Prices

News that Vale is to re-start production at its Sudbury Clarabelle mill will not come as welcome news to other struggling nickel producers. A report detailed how 1,200 staff that did not join the strike back in May would first process stockpiled ore at Clarabelle but that next week the company would recommence work at the Coleman 153 and Garson Ramp mines. The nickel market has been in oversupply for the last few years as stainless production has collapsed around the world. But as mines and refineries have been closed and demand has remained strong in China the market has been coming back towards some semblance of balance. To overcome the marginal cost of production, according to Fitch analysts, market prices need to be consistently above $7/lb. At current levels it will be slow to encourage more production to be brought back on stream.

A surge in Chinese imports this year, up nearly 50% from last year to July has been driven by China’s stainless mills running at near full capacity. Vale’s strikes were taking some 5-6,000 tons per month out of the nickel supply market which has supported the price levels we have seen the last couple of months. Providing more capacity doesn’t come back, prices should remain above $7/lb this year and next before new mines such as Brazil’s Barro Alto, Ambatovy in Madagascar and Vale’s own Goro mine in New Caledonia come on stream in 2012-14. Although stainless demand has been weak globally with the exception of China, most are expecting a return to modest growth next year. If that happens, Sudbury’s return to production should not disrupt the market too much.

What does the future hold? That depends on the sentiments of the market and the perception of how likely growth in stainless demand is going to be later this year and into next. Chinese local market prices have dropped slightly in the last month but so far only in line with the easing of nickel prices. Inventory levels of finished stainless are back to near record levels in Wuxi, a key stainless market in China, and demand remains weak in the rest of Asia. Buyers should probably not jump to cover forward demand for 2010, prices could drift lower in the coming months before firming next year.

–Stuart Burns

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