November 16, 2010 / 2:30 AM / 7 years ago

WRAPUP 1-Nickel expansions fan concerns of oversupply

4 Min Read

* SLN to boost output 20 pct to 65,000/t a year by 2013

* Xstrata to reopen Sinclair nickel mine in Australia

* Analysts warn of looming supply glut (Recasts after Xstrata interview)

By James Regan

NOUMEA, New Caledonia, Nov 16 (Reuters) - Two major nickel producers, New Caledonia's Societe le Nickel (SLN) and London-listed Xstrata XTA.L, unveiled major new expansion plans on Tuesday, underlining concerns of a global supply glut.

SLN and Xstrata, both top-five global nickel producers, revealed to Reuters their plans to bring on annual production totalling more than 10,000 tonnes over the next few years.

That is in addition to Brazilian miner Vale's (VALE5.SA) 60,000-tonnes-a-year Goro project in New Caledonia and another Xstrata development, the 60,000-tonnes-per-year Koniambo project, also in New Caledonia.

Industry analysts are worried the wave of new nickel production will lead to oversupply within the next five years and send nickel prices into sharp reverse, snuffing out a recovery that has seen prices rise about 20 percent so far this year.

But SLN Managing Director Pierre Alla shrugged off these concerns, saying the company, controlled by France's Eramet (ERMT.PA), would boost annual output to 65,000 tonnes, an increase of almost 20 percent, within three years.

"We think there is room for these additional projects on the world market," Alla said in an interview on the sidelines of an international conference in New Caledonia, a South Pacific nation estimated to hold up to a quarter of the world's nickel reserves.

SLN produces 5 percent of the word's nickel from its Doniambo smelter in New Caledonia. Its output fell to 52,000 tonnes in 2009, amid the global financial crisis, but it is back at full capacity and is estimated to produce 55,000 tonnes this year.

Xstrata to Restart Australia Mine

Xstrata's chief financial officer for nickel operations, Shaun Usmar, told Reuters on the conference sidelines that it would reactivate its Sinclair nickel mine in Australia after suspending operations due to the global financial crisis.

"Sinclair will restart very shortly," he said.

Sinclair, reported to have an annual capacity of 5,500-6,000 tonnes, was mothballed last year. The decision was made when nickel fetched around $11,000 a tonne, half its current price.

Nickel CMNI3 currently fetches about $22,450 a tonne, for three-month delivery, having risen 20 percent so far this year. But it is well off its year high of $27,095, thanks to rising output of nickel pig iron, a substitute for primary nickel.

Andrew Mitchell, a sector analyst for Brook Hunt, told the conference that the market faced over-production by 2013, with prices likely to fall by as much as 40 percent.

"We could see prices in the $6-$7 a pound range ($13,200-$15,505 a tonne)," Mitchell said.

Macquarie Bank analyst Jim Lennon said additional supplies of nickel pig also threatened to undermine the market.

He estimates global nickel pig iron production at around 150,000 tonnes a year, mostly from Indonesia and the Philippines, but with huge potential for additional output from China.

Xstrata's Usmar conceded a "modest oversupply" could emerge in nickel around 2015 but he said the industry had failed to invest in exploration to underwrite long-term supplies.

Reactivation of Sinclair would enable Xstrata's Australian operation to maintain output of around 16,000 tonnes a year as a nearby mine, called Cosmos, depleted its reserves, Usmar said.

World consumption of primary nickel is forecast to rise to 1.53 million tonnes next year from 1.43 million tonnes in 2010, according to the International Nickel Study Group (INSG). (Editing by Mark Bendeich and Manash Goswami)

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