Australia billionaire spends big on nickel even as glut worries persist

Thu May 2, 2013 5:00pm EDT

* Billionaire Clive Palmer earmarks $1 bln to upgrade nickel refinery

* Wants to improve margins to battle plummeting prices

* Xstrata, Vale, others soldier on with big projects

* Extra output could deepen supply glut

By James Regan

SYDNEY, May 3 (Reuters) - Australian mining magnate Clive Palmer is joining Vale, Xstrata and other sector heavyweights pouring money into nickel despite a dire near-term outlook for demand, as they plough on with projects bought on the cheap or as part of corporate takeovers.

Hopeful that appetite will pick up as the global economy improves, they are reluctant to shed assets after investing billions. But that risks deepening a supply glut in the short term and piling more pressure on nickel prices, which have fallen around 13 percent so far this year and were the worst performer on the London Metal Exchange in 2012.

Palmer, a self-described eccentric who is building a replica of the Titanic, plans to spend a hefty $1 billion this year upgrading an ageing nickel refinery in Australia, battling to reduce production costs through steps such as revamping equipment and waste disposal operations.

"The $1 billion ... will help make the refinery more efficient in a time of low nickel prices," said Andrew Crook, a business adviser to Palmer. He declined to give details on operating costs as the Yabulu plant is privately owned.

Xstrata Plc, Vale SA, First Quantum Minerals Ltd, China Metallurgical Corp, Sherritt International and Sumitomo Corp are among companies spending heavily to build new nickel mines and processing plants.

Most of these were snapped up at low prices or as non-core components of takeovers, such as Vale's buyout of Canada's Inco and Xstrata's purchase of Falconbridge, both in 2006. Soon after that, nickel zoomed above $50,000 a tonne, more than three times today's prices.

Now nearing completion, they are running head first into an oversupplied market, hurt by weak sales to stainless steel manufacturing, which buys two-thirds of the world's nickel.

LME nickel is trading at around $15,000 a tonne, over $6,000 off its 2012 peak, with UBS saying prices this year will average only slightly higher at about $17,000.

Mining consultants Wood Mackenzie estimate at least 40 percent of the world's nickel industry is currently running at a loss. But industry executives are holding on for an upturn.

"We are expecting things to pick up in the second half of the decade as demand recovers from its cyclical low and all the new capacity coming on now proves inadequate to meet future market requirements," said David Singleton, managing director of Posiedon Nickel, which is spending A$197 million ($203 million) to redevelop an Australian nickel mine.

NEW CALEDONIA, NEW SUPPLY

Xstrata this month started production at its $5 billion Koniambo nickel mine and smelter in New Caledonia, six years after it came packaged with the Falconbridge acquisition.

The French South Pacific territory holds a quarter of the world's reserves and is set to produce a further 130,000 tonnes of nickel - one-tenth current global output - when Koniambo gets into stride in late 2014 and Vale's equal-sized Goro project there is at full steam.

But the bleak outlook could be driving some producers to look for a way out, with Vale promising a review this year of Goro's ability to turn a profit and some analysts saying it could end up selling all or part of the project.

As part of his refinery revamp, Palmer will add new rail lines to port and establish his own stevedoring operations.

Separately, his company Queensland Nickel, has also commissioned four new bulk carriers to transport ore to Yabulu from Asia and the South Pacific.

But the investment in the plant, built nearly 40 years ago, is unlikely to boost output beyond the 35,000 tonnes of nickel produced each year.

"The world's got plenty of nickel already," Palmer's adviser, Crook, told Reuters.