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Royal Nickel Corp: Indonesian Ore Export Ban Opens Door to the Next Generation of Nickel Mines
Nickel prices have been weak, but the recent Indonesian government announcement banning ore shipments outside the country may be the shock that reverses the trend. In this interview with The Mining Report,Mark Selby, senior vice president of business development for Royal Nickel Corp., walks through his analysis that indicates nickel price increases and inventory reductions are imminent, while demand continues to grow and over a quarter of global mine supply is shut in. He considers nickel in 2014 one of the best commodity trades in a generation. To capitalize on this unique set of circumstances, Royal Nickel’s Dumont Nickel Project follows the path of other large-reserve, large-scale mines in the copper and gold sectors that have changed the mining industry and made early investors fortunes.
MANAGEMENT Q&A: VIEW FROM THE TOP
The Mining Report: The nickel industry has been through tectonic changes in the last 10 years, including large corporate takeovers and fundamental changes in supply available to the market. Can you summarize where the nickel industry has been and where it is going?
Mark Selby: Over the past five years, we’ve seen continued robust growth in nickel demand. Over that period, global nickel demand grew in the high single-digits, while Chinese nickel demand grew at double-digit rates. Stainless steel, which is increasingly used across all sectors of the economy, accounts for approximately 70% of total nickel consumption.
Everyone is familiar with stainless steel appliances like refrigerators, but there are thousands of tons of stainless steel used in less obvious applications in the chemical, manufacturing and service sectors. A good example is just about every fast food outlet in the world, with their expanse of stainless steel counters and food prep equipment used throughout their operations. The nickel is there; it’s just not always easy for consumers to see.
There are a lot of exciting parts to the nickel story. From an economic point of view, one of the most interesting is price: nickel has historically been one of the most expensive of the common base metals (copper, lead, zinc, aluminum, etc.), which has steered its use in high-value applications such as jet engines, gas turbines, nuclear power plants and medical devices. As the Chinese economy moves up the value chain, the per capita consumption of the higher quality nickel alloys is increasing. In 2010, Chinese per capita consumption of nickel was only one third of the way to German or Japanese consumption levels, which China had already achieved in less value-added materials like carbon steel. Over this decade, we expect China to add at least a million tons more nickel demand as the economy continues on the path of industrialization.
There has been a lot of talk of a slowdown in the Chinese economy over the past few years. However, over that same timeframe, the Chinese nickel demand annual growth rate was in the mid-teens and added over 100,000 tons of nickel demand growth every year. No matter how you look at it, the demand side of the nickel story is robust. We don’t see any reasons why that will change in the near future.
TMR: Can you discuss the evolution of the supply situation in the nickel market? I am especially interested in the role of Indonesian ore and politics on nickel in the future.
MS: Back in the early 2000s, there was a whole cupboard full of undeveloped nickel projects that were idle. Most of those projects were discovered in the wake of a global nickel boom from the late 1960s-early 1970s. Those projects that were developed came on-line just in time for the global economy to slow down in the 1970s. As a result, there was a large inventory of deposits that sat idle.
When I worked at Inco, we saw the rapid growth in Chinese demand for nickel very early. It was clear to us that the development of nickel projects would not be quick enough to respond to the increase in demand. And that is what happened. Beginning in 2002-2004, and then again in 2005-2007, demand growth far outpaced supply growth. There were massive spikes in nickel prices as the industry just couldn’t keep up with the demand. Nickel prices went from $2 per pound ($2/lb) in 2001 to nearly $25/lb by 2007. That price spike in 2007 got many of these projects (which had been sitting idle for several decades) financed and into construction. Most of those projects were laterite deposits and many utilized new technologies, such as pressure acid leaching.
TMR: So, there was new mine supply, but what about the creation of the nickel pig iron (NPI) industry in China? That was a big change to the nickel industry.
MS: By 2006, Chinese stainless steel and nickel demand were growing at breakneck pace. And the nickel industry had provided little supply growth, so the Chinese did what the Japanese did in the 1960s, which was to take boatloads of soggy dirt (technically “ore”), primarily from Indonesia, and ship it to furnaces that they already built to make pig iron for carbon steel. That’s where the name “nickel pig iron” came from. The innovation was to build a low-capex, high-opex way of supplying nickel to their domestic industry. They created a Chinese ferronickel industry. Most new ferronickel plants in China use existing Rotary Kiln Electric Furnace (RKEF) technology to produce NPI. The only real operational innovation was to take the NPI all the way to stainless steel in a single facility while the NPI is molten. Even with improving technology and operational efficiency, NPI is a relatively expensive commodity to produce compared to nickel sourced from conventional mines.
The end result was a huge change in the industry. Starting in 2007 and then exploding over the next four or five years, the Chinese added a lot of capacity. For most of that time, they had a willing ore supplier in Indonesia that seemed willing to ship as much ore as the Chinese needed, despite capturing very little of the export value for the Indonesian economy.
The massive growth in NPI supply combined with the new production from the projects that came on-line in 2007 relieved the supply pressure on the market. In fact, the supply dynamics have created significant surpluses in the last two or three years, making nickel one of the least successful metals based on price appreciation.
So what does it mean for the future? We have seen the project backlog cleared out since 2007. We were already bullish for the second half of this decade based on Chinese demand growth, which we expect to continue to be robust, and a lack of new projects. This was even before the Indonesian ban.
TMR: The Indonesian ore export ban was announced in mid-January. What are the implications for the nickel market?
MS: In January, the Indonesian government announced that they would ban all unprocessed nickel ore exports. This was a tectonic shift in the nickel market. I expect this action to dramatically pull forward the shortages we expected to see anyway. Under the current conditions, by the second half of 2015 we expect severe nickel shortages to emerge and will start seeing the first signs this month. That is about how long it will take to work through the inventory once 20-30% of global nickel supply has been shut in with this export ore ban.
TMR: Is the ore for the Chinese NPI producers mostly from Indonesia?
MS: About 75% comes from Indonesia. There are two types of lateritic nickel ore from Indonesia, limonite and saprolite. The saprolite grading between 1.8-1.9% nickel is the most common ore. Notably, Indonesia is the only significant source for that higher grade material that’s available for export in any quantity.
The Philippines can supply probably 10-20% of what Indonesia’s currently supplying. The main ore there is limonite with a lower grade at 1.4-1.5% nickel. Again, whether the Philippines has the ability and the willingness to export significantly higher quantities of that material remains to be seen. We think they won’t be able to come anywhere close to that.
The only other place where you see large higher grade laterite resources is in places like New Caledonia, but that’s committed to local plants or they have long-term joint venture agreements with facilities located in Japan and Korea. Further down the list of potential alternative sources of ore to the Chinese NPI industry include places like Cuba or Guatemala, and those locations don’t have the grade or scale of resources compared to Indonesia, but what they do have is much higher transport costs to China.
TMR: What does that all mean to prices?
MS: We think we’re going to see sharply higher nickel prices to force demand in line with available supply. That happened in 2005-2007, where you literally didn’t have enough nickel prices rose and there was demand destruction. This scenario will encourage development of lower grade saprolite deposits over time. Eventually, the Chinese will be able to use the low-grade material as ore, but because of higher energy and material inputs to that process, it likely puts a $9-10/lb floor on the global nickel price. Making NPI with 1.4% nickel saprolite is not a high-margin business.
TMR: In the past, you have mentioned the Chinese cost to produce nickel in NPI was approximately $6/lb. That is about where the metal is at present. Does that mean that your new “floor” for the metal will be closer to $9/lb once the market reaches equilibrium? What are the arguments against a price increase to that level?
MS: The first of two pushbacks I hear is that alternative sources will be found. I just discussed that. The second argument against a price increase is that they’ll build plants in Indonesia. The plants in China have much more than access to ore. They have ports, access to power and whole industrial networks available to tap into. The Indonesian ore is located in areas with minimal infrastructure, no power and very little skilled labor. Building a plant there will be expensive and slow compared to China. However, some plants will be built. In fact, Royal Nickel Corp has a relationship with Tsingshan, which is the leading stainless steel producer in China. They’ve been considering a plant for many years and they’ve finally started construction this past summer. That’s a sign of the challenges to build a NPI plant in Indonesia.
TMR: How does Royal Nickel Corp.’s (RNX:TSX) project differ from other global nickel projects?
MS: Our flagship project is the Dumont Nickel Project. It has many attractive features for an undeveloped, large nickel project. The first is deposit type. Dumont is a sulfide deposit rather than a laterite deposit. Large, undeveloped nickel sulfide deposits are rare.
Another project differentiator is location?our deposit is located in the province of Qu