Norilsk Sees Nickel Surplus Shrinking Next Year on Idled Plants

OAO GMK Norilsk Nickel, the world’s largest producer of the metal, urged producers to start idling unprofitable operations to fight a surplus that has damped prices and caused losses.

Consecutive quarters of losses should push companies to cut output, which may narrow the nickel surplus 30 percent to 70,000 metric tons in 2014 from 100,000 tons this year, according to Anton Berlin, marketing director at ZAO NormetImpex, a unit of Norilsk Nickel.

Nickel, used in stainless steel, tumbled into a bear market in May and is set for a third yearly loss, as demand waned and China increased output of a substitute derived from lower-grade ores. Additions to Chinese nickel pig iron capacity outstrip closures, creating a third consecutive annual surplus in 2013, according to a Deutsche Bank AG report in August.

“Unfortunately, we don’t see significant changes on the nickel market yet compared with what we had at the start of the year,” Berlin said in an interview Sept. 25. “From 35 to 40 percent of producers are still loss-making and the gap between supply and demand remains high.”

Nickel traded at about $13,887 a ton on the London Metal Exchange by 10:35 a.m. local time, down 19 percent this year, making it the worst performing industrial metal.

Norilsk Nickel posted net profit of $545 million in the first half, down 63 percent from the same period of 2012, while Glencore Xtrata Plc recognized a $7.7 billion charge on Xstrata mining assets, which include nickel.

Few Percent

“We are disappointed that we aren’t seeing capacities closing,” Berlin said. “International industrial groups are just subsidizing their loss-making operations, while other high cost producers are afraid to lose their client base. That delays the decision to cut capacity and doesn’t allow the price to recover.”

Norilsk hopes that the average price will rise by a few percent in 2014, while not seeing “significant changes on the market,” Berlin said. Macquarie Group Ltd. forecasts a nickel surplus of about 80,000 tons this year, less than Berlin’s estimate, and about the same in 2014.

The nickel price is “on the verge of the production cost of Indonesian nickel ore miners,” meaning there isn’t much further to fall, according to Berlin.

Indonesia’s fulfilling a promise to ban nickel ore exports to China from 2014 would help to reduce NPI output, estimated to exceed 400,000 tons this year, Berlin said. It’s not clear whether the country will impose the ban, he said.

China’s development of rotary-kiln-electric furnace, or RKEF, technology to produce NPI, won’t have as strong an impact on the market as some analysts have said, according to Berlin. RKEF is only used in 20 percent to 25 percent of NPI output and only one plant has managed to lower production costs as low as $12,000, Berlin said. That plant is next to a port, he said.

NPI makers using older technologies have costs ranging from $14,000 to about $18,000 per ton.