A Breakthrough in China, [Nickel Pig Iron] Another Blow for Sudbury – by Andy Hoffman (Globe and Mail-June 15, 2010)

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This article was the cover story of the Saturday, June 12, 2010 edition of the Globe and Mail’s Report on Business section.

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

Andy Hoffman, Asia-Pacific Reporter – 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.

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