(Corrects surplus size in second paragraph.)

Oct. 28 (Bloomberg) -- BHP Billiton Ltd., the world's third- largest nickel producer, said high-cost competitors are under pressure because of falling prices and slowing demand for the metal used to make stainless steel.

There may be a 22,700 metric ton nickel surplus this year, increasing to 47,400 tons next year, the Melbourne-based company said in a presentation today to the Australian Stock Exchange. About 62 percent of all nickel produced is used to make stainless steel.

Nickel has dived 58 percent this year as the deepening global credit crisis and slowing economic growth cut demand for metals, forcing producers to close mines and defer projects. At the same time, a shortage of equipment and skilled labor has increased the cost of developments under way, BHP said.

``All major nickel projects have experienced significant capital cost escalation,'' Stephen Williams, BHP's marketing director for stainless steel materials, said in the presentation.

Rio Tinto Group, the target of a hostile $60 billion takeover offer from BHP, said last week the price slump may force production cuts in Western Australia. Rio, which doesn't produce the metal, is planning a $2 billion project in Indonesia.

BHP said the cost of developing its Ravensthorpe nickel mine in Western Australia has doubled to about $40,000 a ton. Other major projects, including Xstrata Plc.'s Koniambo mine in New Caledonia and Cia. Vale do Rio Doce's Goro and Onca Puma mines in New Caledonia and Brazil respectively, may face cost increases of more than 73 percent, Williams said.

BHP rose 3.1 percent to A$25.36 at the 4:10 p.m. Sydney time close time on the exchange.

While current markets are difficult, urbanization in China will help maintain robust long-term demand growth for both stainless steel and nickel, Williams said.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

Last Updated: October 28, 2008 02:55 EDT