Photo: Sudbury Integrated Nickel Operations

Nickel is now at levels not seen since 2003, yet capacity exceeds demand

December 2015 - Prices have slid almost every month since the middle of 2014 to reach $10,000/metric ton–a level at which over 60 percent of production is under water. There they had found some stability, but have since dropped below $9,000/metric ton. At this level only the most cost-effective producers, sustained with by-product revenue, are making a profit. What is most confounding is the lack of reaction on the supply base: Output has barely decreased. Between January and September 2015, prices fell 33 percent but refined nickel output fell only 4.7 percent. While the supply continues to stay strong, prices will find no support.

The main reasons behind this lack of response are a reduction in operating costs and a strategic decision. Clearly, producers benefit from lower production costs. Lower oil prices, lower transportation pricing and lower nickel ore costs have all depressed the entire cost curve. This means that the 90 percent level would be likely to be closer to $11,000/metric ton. But even this improvement still leaves most operations unprofitable at present selling prices.

The rest of the difference must be attributed to strategic will. Firstly, the cost of putting a plant on care and maintenance while waiting for prices to recover to profitable levels again is significant. Labor and other overhead costs can be reduced but facilities need to be kept hot even while failing to generate income. 

The more pervasive argument, however, is that producers don’t want to give up market share. A company may fret about losing money today, but cutting capacity creates an opportunity for competitors. Closing or mothballing a plant will tighten supply, and maybe enough to raise prices and bring a competitor closer to profitability. Instead it is better to slash the cost of running a plant and hope a competitor is forced to make a unilateral decision to cut capacity. Until then, supply will remain excessive and prices will be under pressure.

While there is some scope for nickel prices to fall further, given the level of unprofitability it is more likely that the price floor has been reached. Equally, we see no reasons for prices to jump, and so prices will track sideways before slow increasing on the small capacity increases. MM

Jason Kaplan is the Senior Research Manager-Pricing and Purchasing at IHS Global Insight.