Nickel: A breakthrough in China, another blow for Sudbury

Published by MAC on 2010-06-19
Source: The Globe and Mail

A breakthrough in China, another blow for Sudbury

No longer just a low-wage workshop, China is reshaping world markets through innovation - including a revolutionary alloy that takes aim at Canada's nickel belt

By Andy Hoffman, Asia-Pacific Reporter

The Globe and Mail

11 June 2010

Xuzhou, China - Ask Li Guang about the prospects for his business and a self-assured grin creeps across the young executive's face. It's a smile that means trouble for Canada's nickel-mining capital of Sudbury, Ont., more than 11,000 kilometres away from Mr. Li's office in eastern China.

"Our production has quite a lot of advantages compared to refined nickel," says the budding metals titan, who is all of 30 years old and dressed in a short-sleeve dress shirt and black jeans. "Now, in China, many other enterprises are going to enter this market. Gradually they will take over a lot of the share of refined nickel."

Mr. Li and his company, Jiangsu Mingzhu, are among the many Chinese manufacturers churning out a revolutionary product known as nickel pig iron or NPI. Despite its prosaic name, the alloy has set the global nickel industry on its ear by providing a low-cost alternative to the refined nickel that has typically been used to make stainless steel. Cheap NPI threatens to squelch demand for the refined metal, which is produced in places like Sudbury, as well as in Russia and Australia.

In less than five years, NPI has reshaped the world nickel industry, marking a new stage in China's capitalist evolution. Since it opened itself to trade in the late 1970s, the Asian nation has become famous for two things - lowering the price of manufactured products with its cheap labour costs, and driving up the price of commodities with its aggressive demand. Now it is altering the fundamentals of a vital industrial sector with a homespun innovation.

NPI, a material produced in low-tech Chinese factories, already accounts for as much as 10 per cent of the world's $21-billion-a-year nickel market, more than all the nickel that can be produced annually in Sudbury. Some analysts expect China's NPI producers to double their output this year.

The booming supply of the new product hits hard at traditional nickel miners. Until recently, the world's largest mining firms believed that surging Chinese demand for the metal would last for decades. As a result, fevered takeover battles erupted in 2006 and 2007 for Canada's two nickel giants, Inco and Falconbridge.

But the days of $24 (U.S.) a pound nickel, last witnessed in 2007, are unlikely to ever return. The average Chinese producer of NPI can now be profitable at nickel prices of about $8.50 a pound - just about exactly where prices stand right now. If nickel prices were to surge, China's NPI producers could quickly flood the market with their lower-cost alternative.

"It does put a cap on world nickel prices. If not in practical terms, at least in psychological terms," concedes David Constable, vice-president of investor relations at Quadra FNX Mining Ltd., a Canadian company that began as a Sudbury nickel producer but has diversified its production to focus primarily on copper.

BHP Billiton Ltd., the world's largest mining firm, has already turned bearish on nickel and sold some of its mines. The emergence of NPI was a key factor in the decision, analysts say. They expect the Chinese product's impact to only get larger with time, as more producers enter the fray.

In a worst-case scenario, NPI could usurp all of China's demand for traditional nickel, reducing the global market for the metal and creating a nightmare for firms that paid top dollar for nickel assets at the height of the market. Among the firms that invested heavily were Vale SA, the Brazilian iron ore giant that paid $19.4-billion in 2006 to win control of Inco's Sudbury operations, and Xstrata PLC, the Anglo-Swiss metals conglomerate that scooped up Falconbridge and its Sudbury nickel assets at a price that valued the company at more than $22-billion. (Both Vale and Xstrata declined comment for this story.) Vale's nickel production in Sudbury and Voisey's Bay, Newfoundland, has been crippled for nearly a year by a bitter strike over workers' wages and benefits. If and when production resumes, the company's commitment to exploration and expansion in Canada will have to be made with the threat of NPI looming large.

How did a low-profile collection of Chinese manufacturers upset the plans of the world's mining giants? It's a story about ingenuity born out of necessity. It's also a story about China's emerging entrepreneurial class and its growing impact on the global economy.

Cost advantage

The heart of Mr. Li's burgeoning metals empire is hardly a high-tech showpiece. The plant where Jiangsu Mingzhu produces NPI in the city of Huaibei in China's Anhui province belches smoke. A stray dog picks at a pile of rubbish, while a worker sits atop a hill of nickel ore, spraying it down with a hose to keep it from turning to dust and blowing away in the wind.

The NPI plant sits right beside its electricity source - a coal-fired plant. "We spend 160,000 yuan [about $24,300 Canadian] on electricity per day," boasts Wu Jinduo, the plant's sales and supply director.

Workers begin the NPI process by mixing together three ingredients - coking coal, nickel ore from Indonesia, and a mix of gravel and sand known as aggregate or flux. The mix goes into one of the factory's three furnaces, where it's blasted with high heat, reduced and concentrated. The molten material is then poured into moulds to make bars of nickel pig iron. Workers use long metal rakes to scrape the remnants of the metal liquid from the container.

The process is dirty, dangerous and rudimentary. But it contains some vital advantages.

Foremost among those advantages is the factory's ability to capitalize on several low-cost materials - cheap power, a small amount of coking coal, and, most important, low-grade Indonesian ore.

The ore contains less than 2 per cent nickel, making it unsuitable for traditional nickel production. But it is nearly half iron. Thanks to that high iron content, the NPI that emerges from this plant contains a generous amount of nickel - 10 to 12 per cent - mixed into a base that is nearly all iron.

For China's thousands of stainless steel producers, the combination of nickel and iron is hugely attractive. They pay NPI producers the same price (or slightly less) as they would pay traditional producers to get the nickel content they need to make stainless steel. They get a bonus of iron - another ingredient needed to make steel - for free.

Exactly who invented the NPI process is unknown. Industry executives say Chinese producers took their first faltering steps with the product around 2005. The early batches of NPI were prohibitively expensive and low grade, containing only about 4 per cent nickel or less. The world's big nickel producers took little note.

Development went into fast forward when nickel prices spiked in 2007 and China's stainless steel producers were forced to look for alternatives. As nickel soared to $24 (U.S.) a pound from $10, the economics of NPI suddenly looked more attractive. Many Chinese smelters along the country's east coast switched from producing other metals to making NPI, a shift that led to major improvements in smelting techniques.

In Xuzhou, Mr. Li's company was among the most important innovators. Mr. Li's father had founded Jiangsu in the 1980s to produce metal alloys, but by 2006, the company had moved into producing NPI. It soon figured out a way to enhance the quality of the material. "We were the first enterprise in China to smelt pig iron by electric furnace," Mr. Li says.

By switching from blast furnaces to electric furnaces, Chinese NPI producers can now make material containing between 8 and 15 per cent nickel. Similar in quality to ferronickel produced by nickel giants such as Vale, the Chinese NPI production can be used to make high-end "300 Series" stainless steel.

By 2009, the top NPI producers had reduced production costs to between $7 and $8 a pound, according to analysts. By December of last year, approximately 70 Chinese firms were producing NPI, says Celia Wang, an analyst at Shanghai Metals Market, a unit of research firm CBI China, and an expert in the NPI industry.

Ms. Wang estimates that NPI production hit 44,000 tonnes of nickel in the first quarter and she expects output to break records this year, reaching between 160,000 tonnes and 180,000 tonnes of nickel - production that otherwise would have come from traditional refined nickel miners.

China is expected to gobble even more NPI in the future. Until now, demand has been driven by small private manufacturers of stainless steel. The country's largest steel producers, the state-owned enterprises (SOEs), have yet to begin using NPI on a wide scale.

Mr. Li says it's only a matter of time before the big producers, which make about 40 per cent of China's stainless steel, turn to NPI. "They sell their products in the higher end of the market so they can afford refined nickel, right now," he says during an interview in his spacious office in Xuzhou. He predicts that within two years the SOEs will diversity their sources of supply. If so, that will take another big bite out of global demand for refined nickel.

Environmental worries

The question is whether NPI will become more than a Chinese phenomenon. Because of steep duties, it's not economical for Chinese NPI producers to export their product to stainless steel producers outside of China. However, Jiangsu Mingzhu is planning to build an NPI plant in the Philippines; it is also looking at constructing another offshore plant in Indonesia.

Jim Lennon, an analyst with Macquarie Group based in London, isn't ready to write off the traditional nickel industry just yet. He points out that NPI requires not only cheap nickel ore, but also coking coal and inexpensive electricity - a combination that is hard to find outside of China. Still, Mr. Lennon expects that NPI production in China could reach 200,000 tonnes of nickel this year, or about a third of Chinese demand.

What could stop China's NPI boom? One threat is growing environmental concerns. China has already moved to shut scores of high-polluting coal plants and could set its sights on smelters used to produce NPI. As well, if China allows its currency to appreciate, NPI producers could feel the pinch.

But Mr. Li, the young chief of Jiangsui Mingzhu, doesn't seem to be worried. With five plants in China, Jiangsu is now the country's second-largest NPI producer. Mr. Li plans to take his company public on the Hong Kong Stock Exchange within the next two years. He has plenty of reason to grin - and Sudbury has plenty of reason to worry.

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Everything you ever wanted to know about nickel pig iron but were afraid to ask

What is it?

Nickel pig iron (NPI) is a material produced in China that is used as a substitute for traditional refined nickel in the production of stainless steel. Nickel is the key ingredient that makes stainless steel shiny and corrosion resistant.

Is it new?

Yes. NPI was first made in China in 2005 and only produced in large quantities beginning in 2007.

How is it made?

The key ingredient in NPI is low-grade ore, usually imported from Indonesia or the Philippines. The ore, which generally contains less than 2 per cent nickel, is unsuitable for traditional nickel production. NPI manufacturers mix the ore with coking coal and aggregate or gravel, then transfer it to a furnace, which smelts it. NPI producers originally used blast furnaces powered by coal, but a new generation of producers rely upon electric furnaces, which produce NPI with a higher nickel content.

What does NPI consist of?

NPI consists of 4 to 15 per cent nickel. The rest of the material is pig iron - an important advantage since iron is also needed to produce stainless steel.

How is this different from traditional nickel from Sudbury?

Traditional nickel begins with higher-grade ore, with a nickel content typically above 2 per cent. The ore is crushed and smelted to remove many impurities. The smelted material goes to a refinery where it is processed into pure nickel.

Is NPI cheaper to produce than refined nickel?

It depends upon how you do your accounting. Innovation and improved technologies have reduced the cost to between $7 (U.S.) and $8 a pound of nickel. In comparison, the cost of producing a nickel in Sudbury is thought to be about $5 a pound. However, the cost of building a traditional nickel mine, smelter and refinery are massive compared to the cost of building an NPI factory.

Why do Chinese stainless steel producers use NPI?

For two reasons. One, they can often buy the nickel content in NPI for slightly less than buying the equivalent amount of pure nickel. Two, they get the pig iron in NPI - which they need to produce stainless steel anyway - for free.

Why is NPI used only by Chinese stainless steel producers?

China levies a steep export duty on NPI that makes it cost prohibitive to ship the product outside of the country. To avoid the duty, some Chinese companies are planning to build NPI plants in the Philippines or Indonesia.