GLG News by Salvatore Pinizzotto

Implications: The events of the last few months have showed that expectations for a stainless steel production increase for this year wher wrong.

Analysis: The marked slowdown in the worldwide stainless steel business, driven by lower tha expected manufacturing activities in all main economic areas has confirmed our previous analysis and the production of stainless steel this year will not register any growth.

Stocks level continue to be high in most markets and overcapacity remains a reality in Europe, US and China.

Emerging markets are not as "decoupled" from the western world as they once seemed. Stockmarkets have plunged and many currencies have fallen sharply. Domestic demand in much of the emerging world continues to slow down.

In this situation is difficult to forecast any immediate recovery in the stainless steel market.

Implications: Raventhorpe nickel mine has always been considered a first class deposit but it shows as difficult is nowadays even for the best equipped mining companies to deliver a project on time.

Analysis: Initial testwork at Ravensthorpe mine started in 1997 and were carry out by Comet Resources as part of a pre-feasibility study. It was acquired by BHP Billiton in 1999 which changed the scope of the project to incluse atmospheric leach.

Approval arrived in 2004, construction started late the same year and the first refined nickel was due in Q3 2007. Implementation period= 8 years and as the article shows it is not over yet.

Raventhorpe is not the only project that has faced problems in the last 20 years. Others are, for instance, Voisey's Bay and Goro of Vale Inco.

The implementation of new mining projects is a huge task which means to consider political, social and technological issues that are correlated one to another and if mismanaged bring as result an importatnt increase in capital costs.

These difficulties, in which, also well equipped mining companies occured over the years is the main reason of the lack of nickel supply recorded in recent years. Unfortunately the majority of the world nickel reserves are of the laterite type which are the most difficult to mine
and often located in countries with significant political and social risks: tit will not be easy to increase nickel mine capacity in the short term.

Implications: Enel's investment plan is considering the development of a mix of technologies to increase security of energy supply and bring Italy a step forward to comply with the Kyoto's goals.

Analysis: The conversion of the power plant in Civitavecchia is only part of the investments Enel intends to do in the next five years. A big slice of the company's investment plan is focused on differentiation of energy related sources with a strong focus on renewable ones. 

1,7 Gigawatt will come from renewable energy sources  and improvements will be done in  existing hydro- and geothermal plants.

Solar panels will be used to generate 5 megawatt close to the gas power plant of Priolo (Sicily) and a pilot plant will be built in S Rossore (Tuscany).

Research on hydrogen will be carry out in Porto Marghera (Venice) and strong incentives will be given to promote micro-generation.

The use of carbon is part of this strategy tending to differentiate resources and we need to overcome any NIMBY approach to make sure that Italy has an appropriate and efficient energy supply network.

Implications: The diversification of sources in energy production is not  a matter only correlated to the level of oil price. The current level of oil price certainly stimulate differentiation but security of supply is another driving force.

Analysis: The development of energy sources (from carbon to oil, natural gas, nuclear energy, renewable energy) continuously evolves according to economic conditions, social developments, technical capabilities and environmental impacts. They compete, cohesist and overcome each other all the time. Historically what we can say is that as soon as one of these sources reach a 5% market penetration it does not go back: this is the current situation of the nuclear energy which is and will continue to be an important source of energy.

The high level of oil price certainly is today one of the driver of a reconsideration of nuclear energy in some country (e.g. Italy) but not  the only one. If we look at oil and natural gas those are provided by country with high political risks and a serious strategy for further developing economies in short supply of energy has to have to consider nuclear energy as a serious alternative.

The current production of world nuclear energy represents 16% of the world total energy production. For the OECD countries this is 25% and for the EU it is 35%. Worldwide there are 28 new reactors under construction, further 38 are planned and 115 proposed. This means that towards the middle of this century there will be 500 GW of nuclear energy available that are still short of the 800 GW estimated by the World Energy Council necessary to cut emissions , by 2050.     

Implications: The stainless steel market is strongly dependent by the Chinese market. Stainless steel production has been so far below expectations and it will be very difficult any recovery during the second half of the year. 

Analysis: At the meeting of the International Nickel Study Group (INSG) - April 2008 - ISSF presented a forecast for world stainless steel production at 30.2 million tonnes , a 9 per cent increase compared to 2007.
The 29 million tonnes forecast, as reported in this newsrelease, appears to be a first revision and maybe not even the last one.

Stainless steel melting production in the first four-five months of 2008 has been certainly below expectations, especially after a long period of destocking which lasted for great part of 2007. In Europe and USA manufacturing acitivity doesn't seem to perform particularly well negatively affecting the portfolio orders of most stainless steel mills. But even in China, stainless steel mills have decided to cut production due to  disappointing market  conditions. Being the the first half of the year usually the strongest in terms of production it seems unlikely any recovery during the second half also considering the possible closure of manufacturing activity in the Bejing area prior, during and immediately after the Olympic games in China.   

Implications: - The nickel market is certainly facing a shortage in supply that is going to be mitigated by fresh addition in coming years.

- Demand will play a crucial role in defining nickel price trends this year. 

Analysis:

The surge in nickel prices is in part due to mounting losses from plan at existing operations (perhaps 50,000 in 2007) and seemingly endless reports of ongoing delays to major projects.

Among the others:

⇒ Sherritt has delayed its $450m 16,000tpa expansion of its Cuban/Canadian nickel operations from an original target of early 2008. Instead 4,000tpa will becommissioned in late-2007, with a further 9,000tpa to be commissioned in 2009 and the final 3,000tpa in 2011.

⇒ The 60,000tpa $2.7bn Koniambo nickel project in New Caledonia, now owned by Xstrata, appears to be under review following an apparent commitment made to proceed with this project made by Falconbridge at the end of 2005

⇒BHP Billiton’s Ravensthorpe 45,000tpa nickel project in Australia has been delayed from mid-2007 to 1Q08.

⇒CVRD Inco’s 60,000tpa Goro project in New Caledonia has been delayed yet again from an end-2007 timeframe to end-2008. The same company has put off from 2009 to 2010 an approximately 20,000tpa expansion to 90,000tpa at its PT Inco operations in Indonesia, due to delays in changing its forestry permit at the site.

Offsetting these delays, there have been a number of surprise go-aheads for new capacity over the past year:

⇒ CVRD Inco acquired the 57,000tpa Onca Puma ferronickel project in Brazil (capex around $1.2bn), has started construction and may well commission this plant in late-2008/early 2009.

⇒ Korean stainless steel producer, Posco has started construction of a 30,000tpa ferronickel smelter in Korea in partnership with SMSP of New Caledonia (the ore supplier) and reportedly will commence operations at this $720mt facility in early 2009.

⇒ CMMC, Jinchuan and Jilin of China have become involved in a project in Papua New Guinea with
Highland pacific to build a 33,000tpa acid pressure leach plant to supply intermediate nickel to China. The $860m project is slated to start in 2009.

⇒ Jinchuan is involved in a project to reopen the Nonoc nickel operation in the Philippines. This
reportedly 30,000t pa project could also start before the end of the decade. Jinchuan also announced that it is taking an interest in the 9,000tpa Munali nickel mine in Zambia (start-up in 2Q08).

⇒ Dynatec is close to funding the 60,000tpa $2.5bn Ambatovy nickel project in Madagascar with its partners (Sumitomo Corporation and Korea Resources Corporation) with a potential 2010 start-up.

In China, there is also a major expansion at small-scale operations planned and in addition there could well be as much as 25,000–30,000t of nickel produced by small blast furnace producers in China using imported low-grade nickel ore to produce “nickel pig iron”, a substitute for primary nickel. Based on planned imports of ore in 2007, this could rise to 50,000tpa plus.

It is clear that the nickel market will suffer from a genuine shortage for a number of years although mitigated by the addition above.

A close look needs the demand situation where the stainless steel production, that recorded high production levels in 2006, could face a slowdown in the second half of 2007. If this will occur we could see some reduction in the nickel price.

Implications: - During 2006 high copper prices have had some negative effect in mining production that now seems to be overcome thanks also to expansions and start-up.

- In the short-term the main concern comes from the development of copper usage.
 
- In the long term copper usage should continue to strongly develop especially in the Asian countries. 

Analysis: Till few months ago the major concern in the copper market was if total world supply could keep the same pace of increase in world demand. We used to discuss about disruptions in mining production and uncertainties due to the renewal of labor contracts in some major copper operations.

Indeed periods of high copper prices tend to have two main negative consequences:

a) producers tend to push to work at full capacity increasing the risk of operational failure;
 
b) high prices tend to originate labor unrest as workers/unions demand to share revenues/profits. 

On the positive side high copper prices facilitate the start up and expansions of operations which till some years ago were considered to be non economic to run. The International Copper Study Group has recently stated that total mine production will increase from 14.877 mt in 2005 to 15.265 mt in 2006, if further strikes will not arise.

World refined production would also increase by 5.6% in 2006 due to big increases recorded in China (according to the latest Chinese data in the period  Jan-Oct '06 refined copper production increased in China by 20% y-o-y), in Japan and in USA.

In the medium-short term the reason of main concern has switched from the supply situation to the future trend in demand. Apart from the European market that is still showing high demand especially from the automotive industry and the power and electronics sectors, the main concerns are focused on the USA and China. It's important to remind that since 2002 China has emerged as the single largest refined copper user country.The recent slowdown in U.S. housing demand has the potential to curb short term demand being the USA the second largest user of the metal.

If the expectations of further slowdown in the  economy of the main user countries will prove to be real we should expect, for the beginning of 2007, copper prices further down from the current levels.

In the long term, we need to consider that copper per capita is still much higher in advanced economies such as the USA and Japan than in many developing countries or economies in transition. Yet in terms of usage per GDP, both Japan and USA show declining amounts, even if their actual usage has somewhat increased. This trend is not surprising if we consider that the service sectors have notably increased their contribution to GDP in these countries. However, there are some significant shifts afoot, particularly in Asia. China's intensity of refined copper use has grown in leaps. If this level of usage continues, China's need for copper would be, by 2050, exceed the entire amount required by the world today.

Copper usage will continue to increase, fed primarily by continued Asian demand as these countries (apart China also India and Vietnam) continue to invest in its infrastructure and their population become more demanding for comfort products (white goods, televisions, automobiles, etc.). 

Implications: The relationship between Philippines and China has recently picked up.

- Substantial increase in imports of nickel ores from Philippines recorded this year.

- More and more nickel from Philippines will find its way to China.

Analysis: In the nickel business the relationship between Philippines and China has recently picked up. The China's need of securing vital raw materials for the growing stainless steel business is pushing Chinese companies to look abroad for investment's opportunities.

Stainless steel is the largest user of nickel in China, accounting for about 50% of the nation's total.

Chinese stainless steel production and manufacturing capacities had increased significantly in the 21st century. Heavy investments by most major steel players, such as TISCO, Boasteel, Zhangpu, Qingpu and foreign groups, had accelerated production to four million tonnes last year from a mere 400,000 tonnes in 1999. China is currently the world’s second largest stainless steel producer with production capacity over 5.6 million tonnes targeted this year.

According to the customs-statistics released in China, this country imported , in the first eight months of this year, 1,465,709 t (equal to 29,314 t of nickel content) of nickel ores (including concentrates) of which 1,292,969 t (equal to 25,659 ) from the Philippines. Part of this material is a low grade nickel ores (laterite ore and low grade garnierite ore) used to produce in China pig iron continuing nickel using existing small blast furnaces.

The main producer of nickel in the Philippines is the company Nickel Asia who owns and operates six nickel laterite mines in the southern part of the country with proven and probable reserves of approximately 668,000 tonnes of contained nickel and measured and indicated resources of 1.57 million tonnes. Most of its nickel ore is sold to customers in Australia and Japan.

However, the business relationship between China and the Philippines will continue to strength in the near future and we'll certainly see more and more material reaching Chinese customers to support the growth of their own companies.

Implications: - After the golden years of the sixties and early seventies, the copper industry in Africa was seriously affected by low copper prices, political instability and lack of investment.

- After a decade of privatizations both in Zambia and Congo copper mine production is posed to further increase in the next 3-4 years.

-  Thanks to relative political stability and high copper prices, Africa is attracting the interest of mining companies and experiencing further exploration.

Analysis: After the golden years of the sixties and early seventies, the copper industry in Africa was seriously affected by low copper prices, political instability and lack of investment. Through privatizations that occurred in the nineties and foreign investment in new projects in the Copper Belt, it is reviving to become again one of the major copper producing regions in the world.

Although copper is produced in various regions in Africa, the Democratic Republic of Congo and Zambia remains the main producing areas and also the ones where important projects are underway.

The Zambian economy has been heavily dependent on the copper industry performance. From 1970 to 2000 Zambian copper mine production entered into a continuous decline slipping from around 700,000 t copper to 250,000 t its lowest level. Zambian copper production started to recover in 2001 after the privatization process of the staten ZCCM (Zambian Consolidated Copper Mines) was completed. In 2005, Zambian copper production reached 430,000 t a substantial increase of 75% from its lowest level in 2000 and it is posed to reach 600,000 t in 2006. Expectations for 2009 are for production to reach 800,000 t.

In the Congo the trend of copper production was similar to that of Zambia. Producing around 450-500,000 t in the early eighties, production went down to virtually nothing in the mid/late nineties. The copper industry was in the hands of the state company Gecamines. 

Today Gecamines has several joint ventures with foreign investors over extensions of the Zambian Copperbelt in the south, among them: Kakanda/Kambove mine together with International Panorama Resource Corporation; Kamoto mine together with Iscor; Kipushi mine together with America Mineral Fields; Kolwezi Tailings mine together with America Mineral Fields and Anglo American plc; Tenke Fungurume mine together with Phelps Dodge and Tenke Mining Corporation (according to Phelps Dodge Tenke Fungurume is one of the largest highest-grade undeveloped copper-cobalt projects in the world; planned start-up is in 2008 at an initial rate of 50,000-100,000 t/y of copper and 4,000-8,000 tpy of cobalt).

Congo's copper mine production is predicted to increase by more than 500,000 t in this decade to reach around 600,000 t by 2009.

The copper mining industry in Africa still faces a number of challenges such as supply of energy, HIV-Aids, growing environmental concerns, need for social investment, possibility that high prices may push government to increase royalties, political instability, security issues, as the perception that this still remains a high risk region for investment.

However, now that a relatively political stability is in place and with high copper prices, this rich copper resource region is again attracting the interest of mining companies and experiencing further exploration. 
 

Implications: - In New Caledonia two types of mineral are exploited:garnierite with a high nickel content (2.5-3%) for which there is reckoned to be a fifty year supply and laterite, less rich (1-2%) but which represents a potential exploitation of several hundred years for nickel and cobalt.

- The SLN Doniambo Plant and the Goro project are at the forefront of nickel production in New Caledonia but both experiencing delays in production (Doniambo) and implementation (Goro) due to mainly social and political issues.

- Nickel production in New Caledonia will this year probably significantly lower than expected putting more pressure to the already balanced nickel market.    

Analysis:

As we reported in previous analysis nickel supply is under constrained due to a lack of big investments in nickel mining and disruptions due to the need to run plants at full capacities (reducing maintenance periods) to avoid delays in supplying the material and also to strikes severely delaying some major projects. 

The Goro project and the SLN Doniambo plant in New Caledonia have been both affected by a strike due to the employment of Filipino workers in the Inco's Goro project (again a sort of nationalism applied to natural resources).

Inco acquired the mining title of Goro in 1991 and construction was announced in 2000. The likely startup is now in 2008 (implementation period 8 years) after a sequence of political, social and technological problems. Goro will use an hydrometallurgy process which employs heated and pressurized sulphuric acid which attacks the iron oxides and separates the nickel. This technology has the advantage of processing lateritic ore recovering the cobalt as a byproduct.

The SLN Doniambo plant uses, instead, a process called pyrometallurgy. With this process the mineral is calcined allowing for an initial reduction of metallic oxides to a solid state. In a second phase the oxides are reduced to a liquid state in electric ovens in order to separate the metal (first smelting ferro nickel) from the slag. After refining, ferro-nickel (25% nickel) and matte (75%) are obtained.

Till some weeks ago the expected nickel production in New Caledonia for this years was estimated to 51, 603 t compared to 46,738 t  recorded in 2005. Due to the recent events it's possible to think at lower production levels maybe below the 50,000 tonnes mark.  

  

Implications: - A strong consolidation process is going on in the steel industry driven by firms seeking more leverage over the few global suppliers of the raw materials (iron ore and coking coal) for making the metal.

- Russians have played an important role thanks to the strength of their financial resources.

- But competitiveness is tough and above all transparency should be granted in the way European companies will be managed.

Analysis: Russian companies have recently showed a great interest in the European steel industry with the aim to become important players in the worldwide market.

They have done so thanks to great financial capabilities mainly owned by the entrepreneurs that control those companies. Roman Abramovich, which also owns 50% of Rusal, the Russian aluminium company was listed by Forbes magazine as the richest Russian, 2nd richest person in Britain and the 11th richest person in the world with an estimated fortune of $18.2 billion; Vladimir Lisin, owner of Novolipetsk, was ranked by Forbes as the third richest man in Russia  with 11.3 billion dollars.

Its' clear that after the privatization process that occurred in Russia about 10 years ago, the big groups have reorganized themselves in the domestic market and now are looking to Europe to have a worldwide dimension. In Europe are various strategic targets and it's not a case that most of these companies are now listed in London and in the United States.

The recent acquisition of the Italian Lucchini by Severstal and the agreement between Duferco and Novolipetsk are clear evidence of this strategy.

It's also clear that in this global market Russian companies will have to fight for acquisitions with their Indian and Chinese rivals that need on one side to grow dimensionally and on the other side to be sure to secure raw material supplies to their industries.

In either way, being those European companies controlled by Indian, Chinese or Russian owner, it will be essential to keep a close eye on transparency in the corporate governance framework in which those companies will come to operate to preserve clearness on the way resources will be used.