May 13, 2014 / 8:36 AM / 3 years ago

UPDATE 2-Japan's Sumitomo Metal sees rising risk of ferronickel output cut

* Japan's biggest nickel smelter says facing ore quality, delivery issues

* Indonesia ban on ore exports has sparked wave of supply fears

* Refined nickel prices have rocketed this year (Recasts on Sumitomo Metal facing risk of output cut)

By Yuka Obayashi

TOKYO, May 13 (Reuters) - Sumitomo Metal Mining Co Ltd , Japan's biggest nickel smelter, said there was an increasing risk it could cut production of key stainless steel ingredient ferronickel, amid growing concerns about ore shortages.

But for now the firm is still aiming to produce 21,400 tonnes of ferronickel in the year through March 2015, Toru Higo, general manager of nickel sales and raw materials at Sumitomo Metal, told Reuters on Tuesday.

Any cut in ferronickel output could tighten supplies for stainless steel producers in Japan and overseas as they grapple with a cut in the growth outlook in formerly fast-growing developing economies.

Ferronickel smelters have been hit by Indonesian bans on exports of unprocessed mineral ores that took effect in January, with Japan importing around half its ferronickel materials from the Southeast Asian nation in 2013.

That ban has fuelled a rise in ore prices and driven up benchmark prices for refined nickel by more than 50 percent so far this year.

"The risk of a cut in production is rising," Higo said, "It is getting harder to get the kind of ores we want when we want."

Sumitomo Metal has enough contracted supplies of nickel ore for the financial year through March, but is facing quality issues and delivery holdups after a switch to suppliers in the Philippines, he said.

"In terms of contracts, we have secured enough ore for this year, but it is not that easy to replace Indonesian ore with ores from the Philippines as they have a lower nickel content and lower quality," Higo said.

Deliveries are also being held up by congestion at Philippines ports as buyers flock to the country, he said.

However, he added that Sumitomo Metal may be able to boost ferronickel output from other smelting processes such as recycling refined metal if it needed to make up for a shortfall in regular production.

NEW CALEDONIA

Sumitomo Metal Mining, Japan's No. 2 ferronickel producer, is also increasing purchases from New Caledonia.

Indonesia and New Caledonia each supplied about 50 percent of the firm's requirements until around 2010, Higo said. At that point, the firm gradually began to diversify supplies on worries that Indonesia could change its export policy.

The company is now aiming to get 60 percent of its ore from New Caledonia and 40 percent from the Philippines.

But New Caledonia last week added to the supply concerns when Vale shut down nickel production in New Caledonia after an effluent spill.

Sumitomo Metal mining said earlier it was not sourcing nickel ore for ferronickel from Vale's Goro processing plant and mine, in which it has a 7.6 percent stake.

London nickel hit a 27-month high on Tuesday as worries mounted over a worldwide shortage.

Tensions over Ukraine and fears that an increasingly out of control conflict might eventually result in sanctions against Russia's Norilsk Nickel, a top nickel producer, have also boosted the metal.

Meanwhile, Pacific Metals Co Ltd, Japan's biggest ferronickel maker, on Tuesday said it had secured enough supplies of nickel ore for this financial year, mainly from New Caledonia.

Pacific Metals, the world's No.3 ferronickel producer, plans to cut output by almost 16 percent to 32,500 tonnes in the financial year through March 2015, from 38,530 tonnes a year earlier, said Senior Managing Executive Officer Takao Niwayama.

But that is due to maintenance of one of its facilities, rather than any potential shortage of supplies, he said at a media briefing after the company's earnings were released.

Niwayama described the recent gains in nickel prices as "sharp", but declined to comment when asked if they were excessive.

The company has no immediate plans to build a smelter in Indonesia, where the government is trying to encourage the growth of a local smelting industry with its ban the export of unprocessed ores. (Writing by Aaron Sheldrick; Editing by Joseph Radford)

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