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Q+A-Nickel pig iron: key swing factor for nickel market

NOUMEA, New Caledonia, Nov 17 (Reuters) - Growth in nickel pig iron output, which can be cheaper to produce than traditional nickel metal, is undermining primary nickel prices and threatens to tip the global nickel market into oversupply over the next few years.

Miners Vale and Xstrata plc , who have major nickel production in the works, told Reuters they are keeping a close eye on the nickel pig iron sector to determine supply forecasts over the next few years.

Vale plans to bring its Goro nickel mine into production next year at a cost of $4.5 billion, while production at Xstrata’s $3.85 billion Koniambo mine is due 2012.

Here are some questions and answers on nickel pig iron:

WHAT IS NICKEL PIG IRON?

Nickel pig iron, also referred to as nickel chromium pig iron, is produced from low-grade nickel laterite ore sourced primarily from Indonesia and the Philippines. Nickel pig iron generally contains less than 5 percent nickel, compared with 25-40 percent in conventional ferronickel. However, some producers are reporting that they are able to produce nickel pig iron with a nickel content of up to 30 percent.

HOW IS NICKEL PIG IRON AFFECTING WORLD NICKEL PRICES? Analysts say pig iron is capping London Metal Exchange nickel prices at around $25,000 a tonne. Production tends to rapidly kick in when nickel passes $18,000 a tonne, providing adequate profit margins for producers and tipping the supply side balance of metal. When prices fall below $18,000 a tonne, nickel pig iron production drops off just as quickly.

HOW MUCH NICKEL PIG IRON IS CONSUMED?

Nickel pig iron accounts for about 10 percent of world nickel consumption, up from virtually zero a decade ago. China accounts for almost 100 percent of the production, estimated by commodities researchers CRU International at 146,000 tonnes annually.

IS THERE ROOM FOR GROWTH?

Yes. CRU analyst Vanessa Davidson calculates that up to 600,000 tonnes of annual nickel pig iron capacity exists. Macquarie Bank commodities analyst Jim Lennon estimates around 170,000 tonnes of additional capacity in China could be reactivated if nickel continues to trade at more than $20,000.

WHERE IS THIS GROWTH OCCURRING?

Mostly in China, where analysts forecast annual nickel consumption growth of 9 percent. This year China is forecast to consume 545,000 tonnes of nickel. Nickel pig iron is expected to fill the gap in needed supplies.

HOW MUCH DOES NICKEL PIG IRON COST?

It typically sells at a discount of 15 percent to the LME nickel price. This makes nickel pig iron particularly attractive to electric arc furnace-based steel producers (mini-mills), which otherwise would buy scrap nickel. Scrap nickel typically sells at only an 8 percent discount to LME nickel. Around 70 percent of nickel pig iron is consumed by electric arc furnace operators, who rely on scrap metal for their raw material, and the figure is rising.

WHERE ARE THE HIGHEST GRADE NICKEL PIG IRON ORES FOUND?

Indonesia, where the nickel content of the ores ranges between 1.6 percent and 1.8 percent. Ore mined in the Philippines ranges between 1.0 percent and 1.2 percent. New Caledonia in the past has exported nickel-pig iron ore but has since stopped production.”Nowadays, all the ore is coming from Indonesia or the Philippines,” said Davidson.

IS USE OF NICKEL PIG IRON LIMITED IN MAKING STAINLESS STEEL?

Yes. In higher-quality 300 series stainless steel the limit is 20 percent nickel pig iron before the integrity of the steel is compromised. In cheaper 200 series stainless steel, up to 70 percent nickel pig iron can be employed. (Editing by Ed Davies, Himani Sarkar)

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