Consolidation rather than exploration

Implications: Xstrata's move for LionOre reinforces the latest trend that it is easier to buy existing production rather than develop new projects

There remain major financial and technological risks concerning the next generation of nickel "mega" projects



Analysis: The Australian government has reportedly approved Xstrata's friendly $4bn takeover bid for LionOre Mining, which boosts Xstrata's presence in the nickel industry.  The increase in concentration will not in itself boost nickel prices as the market will still be determined by the marginal production (witness the 35% fall in the copper market in 2006 on a relatively small increase to LME inventories).   However it is less risky to buy existing operations rather than invest in new projects. It is still not clear that Xstrata will proceed with the 60,000 tonnes per year Koniambo project that it acquired following its takeover of Falconbridge.

The bulk of the next generation of nickel projects are based on laterite (as opposed to sulphide) ores.  The development of Pressure Acid Leaching (PAL) of laterite ores has been chequered to say the least.  Minara Resources (formerly Anaconda Nickel) is still producing below rated capacity more than seven years after it was brought onstream.

The commissioning of other PAL projects have also been delayed - most notably Inco (now CVRD's) Goro project and BHP Billiton's Ravensthorpe operation.  They have also been characterized by massive cost overruns.  Many of the other projects also have high political and environmental risks.  

In the short-term, the major increase to nickel supply is coming from the production of low-grade nickel pig iron within China which has a nickel content of less than 5% based on imported ore.  This new source of production could add 60,000 tonnes to nickel supply in 2007.  However this is merely filling the gap left by conventional producers and is not, at this stage, sufficient to return the market to surplus.  This is most likely to happen by a downturn in demand, which at the moment appears unlikely.