Nickel Pig-Iron Output in China May Jump, Capping LME Price

Nickel pig-iron output in China, the world’s largest metals user, may surge 50 percent this year, possibly curbing demand for the refined product and hurting prices that have lagged behind all other base metals in London.

Production of the low-cost substitute for refined nickel may be 240,000 metric tons in 2011 compared with 160,000 tons in 2010, according to Xu Aidong, senior nickel analyst at Beijing Antaike Information Development Co. Output in China in April was 25,000 tons compared with the average of 20,000 tons per month in January to March, said Xu.

Lower refined-nickel prices may hurt OAO GMK Norilsk Nickel, the biggest producer of the commodity that’s used to make steel resistant to corrosion. Makers of the alternative in China “can produce as much nickel pig-iron as they wish,” according to Citigroup Inc. Baoshan Iron & Steel Co., China’s second-biggest stainless-steel maker, said it’ll use more of the substitute.

“Our forecast is for nickel pig-iron production to reach 200,000 tons this year, however, looking at the output so far as well as the price trend, we may revise this to 240,000 tons,” said Xu, who’s been analyzing the market since 1993.

Refined-nickel futures on the London Metal Exchange have lost 8 percent this year, outpacing declines in copper, tin, and zinc, while lead and aluminum have gained. Nickel traded at $22,770 per ton on the LME at 2:30 p.m. in Singapore, 23 percent lower than the 34-month high of $29,425 set on Feb. 21.

Low-Grade Ore

Nickel pig-iron is made from low-grade, laterite ore from Indonesia and the Philippines. Investors may “be wondering why nickel traded up to $29,000 a ton in the first quarter when the Chinese can produce as much nickel pig-iron as they wish at a cost of $22,000 a ton,” Citigroup’s Jon Bergtheil wrote June 6.

Baoshan Iron & Steel said June 7 it planned to cut refined-nickel use for the first time in at least three years to lower raw-material costs. Higher quantities of nickel laterite will be used instead, according to Dai Xiangquan, assistant general manager at the Shanghai-based company’s stainless-steel unit.

“It’s an industry-wide trend to turn to lower-grade material,” Dai said in an interview. The profit margin for Baoshan’s stainless-steel business was 0.9 percent last year, compared with 22 percent for cold-rolled steel sheets.

The problem for refined nickel “lies with the oversupply and low prices of stainless steel,” Zhang Yan, a trader at Jin Yuan Futures Co., said from Shanghai. About two-thirds of global nickel production goes into stainless steel, which is used to make products from kitchen sinks to aircraft-fuel tanks.

Declining Prices

Hot-rolled stainless-steel prices at China’s ports fell to $3,090 a ton last week, the lowest level since October, according to industry publication Metal Bulletin. The nation’s production of the rust-proof alloy may gain to 14 million tons this year from 12.3 million tons in 2010, said Antaike’s Xu.

Global nickel stockpiles may climb this year as production increases to 1.6 million tons while worldwide usage is forecast to rise to 1.54 million tons, the International Nickel Study Group said on April 12.

“The Chinese have converted a large number of small steel plants into nickel pig-iron facilities in the past three to four years,” Australia and New Zealand Banking Group Ltd. said in a May 20 report. China’s nickel ore imports show “the strong appetite for the alternative nickel market,” the report said.

China imported 8.1 million tons of nickel ore and concentrate in the first four months of this year, up 45 percent from a year earlier, according to customs data.

Norilsk’s Outlook

The global nickel market will return to balance this year from a deficit in 2010 as production increases faster than demand, Norilsk said last month. Primary nickel usage will expand more than 5 percent this year, compared with 15 percent in 2010, said Dmitry Kuznetsov, the company’s chief analyst.

Norilsk produced 283,000 tons of refined nickel last year, according to data from London-based metals consultancy CRU. Brazil’s Vale SA was second, making 155,000 tons and China’s Jinchuan Group Ltd. was third with 130,000 tons.

Costlier electricity, combined with power cuts expected across China this summer, may raise costs for nickel pig-iron makers and could trigger output curbs, said Tao Jinfeng, an analyst at Jiangsu Donghua Futures Co. China raised electricity prices for non-residential users in 15 provinces from June 1.

“This is not a new problem for the industry,” said Wang Chongfeng, an analyst at research Shanghai Metals Market. “Producers have found a way to work their production schedule around it,” said Wang.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE