Annual Average Nickel Price

The monthly average LME cash price rose gradually from
$1.60 per pound at the beginning of 1987 to $2.69 in
November. In December 1987, it suddenly shot up to $3.48.
The rapid increase continued in 1988, with the monthly price
reaching $8.17 in April. These price levels would have been
unimaginable to the nickel market 4 years earlier. Three
factors were primarily responsible for the increase. The first
was a substantial and unforseen increase in demand for
stainless steel, the largest end use for nickel. More than 50%
of stainless steel production in the United States and Europe
is sold through service centers (companies that buy directly
from a stainless mill and sell to customers). Service centers
do not publish detailed sales statistics in terms of end use,
making it difficult for stainless producers to monitor con-
sumption of their product. The second factor was that nickel
producers reduced world production capacity because of low
metal prices during the early and mid-1980’s. At least five
nickel producers closed operations during this period. A third
factor was the decreased availability of stainless steel scrap.
Although Western demand for nickel grew continuously
between 1985 and 1991, the LME price peaked in 1988 and
declined each year afterward until 1994. The reasons for this
paradoxical trend were threefold—the former Soviet Union
(FSU) began gradually increasing nickel shipments to the
West, scrap availability increased worldwide, and world
production of primary nickel increased.
The breakup of the Soviet Union in December 1991
produced massive changes in the Russian economy, one of
which was the partial privatization of the largest nickel
producer in the country, RAO Norilsk Nickel. At the same
time, the downsizing of the FSU military-industrial complex
caused nickel consumption within Russia to plummet. In
1997, Russia consumed only 20,000 metric tons of primary
nickel, compared with 180,000 tons in 1989 (International
Nickel Study Group, 1998). Russian consumption weakened
even more in 1998, slipping to less than 18,000 tons. These
changes led to a surge of primary nickel from Russia, putting
downward pressure on world prices for primary nickel and
nickel-bearing scrap. Russian exports of stainless steel scrap
and high-nickel scrap to the European Union (EU) also
sharply increased, further depressing world nickel prices.
Russia continues to maintain its position as the largest nickel
producer in the world despite its difficult economic situation.
More than 90% of Russia’s output currently (1998) comes
from mines operated in the Arctic by Norilsk Nickel. Because
of internal demands within Russia for hard currency and the
depressed state of the Russian stainless steel industry, Norilsk
Nickel is expected to continue exporting the bulk of its
production to the West at least until 2005.
The Russian situation, the current recession in Japan, and
economic problems in other parts of East Asia have caused
the monthly LME cash price to decline from $3.20 per pound
in June 1997 to $1.76 in December 1998. Since 1997,
Western nickel producers have had to struggle to cut costs in
the face of weakening prices for the metal. Prices improved
slightly in the first half of 1999, climbing back to the $2.25 to
$2.50 level. The commissioning of three nickel mining and
metallurgical complexes in Western Australia at the beginning
of 1999 is, however, expected to put renewed downward
pressure on prices. All three operations use variations of a
high-pressure acid leach process to extract nickel and cobalt
from limonitic laterite ores. The nickel is then separated from
the cobalt by solvent extraction. Several analysts believed
that the three Australian complexes will have low operational
costs and will be extremely competitive because of their
cobalt byproduct credits.
Inco remains committed to the development of the huge
Voisey’s Bay nickel-copper-cobalt deposit in northeastern
Labrador (Inco Limited, 1999, p. 20-21). In December 1997,
Inco submitted a comprehensive environmental impact
statement on the proposed mine and mill to Canadian
regulatory authorities. Since then, the Voisey’s Bay project
has undergone extensive environmental and socio-economic
scrutiny. In March 1999, a special panel overseeing the
environmental review recommended that the project proceed,
subject to a number of stipulations. Complex and lengthy
negotiations are currently (1999) underway with the
Provincial Government and other key stakeholders. The
development of the deposit, which Inco acquired in 1995-96,
is expected to have a major impact on the world nickel market
sometime after 2003.
Pricing Mechanisms for Nickel Metal
On April 23, 1979, nickel contracts were introduced for the
first time on the LME. Leading nickel producers at first
stiffly opposed the LME pricing mechanism. Nickel business
on the LME, however, steadily grew in spite of the
producers’ opposition, convincing the producers to reverse
their position. Producer participation has increased
considerably since 1985 because of the LME’s hedging and
options capabilities. Today, LME prices are the principal
pricing mechanism used worldwide by producers and
consumers of nickel. LME prices and archival statistics are
available 24 hours a day at the LME website, thus minimizing
arbitrage. LME prices are also quoted by day in a variety of
weekly trade publications, including Metal Bulletin, Platt’s
Metals Week, and Ryan’s Notes. In 1999, the LME pricing
system had the support of nine of the larger nickel producers
in the world. Five of the nine are Associate Trade Members
of the Exchange—Inco; Falconbridge (through its principal
shareholder, Noranda Inc.); Outokumpu Oyj of Espoo,
Finland; Rio Tinto Plc. of London; and WMC. All five sell
metal that meets LME specifications. Metal produced by
Norilsk Nickel and the ERAMET Group—two other major
producers—has also been approved for delivery on LME
warrants, together with metal from Sumitomo Metal Mining
Co. Ltd. and several smaller producers. QNI Limited of
Brisbane, Australia—the ninth company—recently became a
major player in the nickel market. QNI has ties to the LME
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