This article came from Northern Life, Sudbury’s biweekly newspaper.
There may have been a drop in nickel prices in recent months, but there’s not much to worry about in the long term, as prices are likely to rise again, according to two Laurentian University professors.
A year ago, nickel prices stood at roughly $10 a pound, and now they’re sitting at around $7 a pound. Jean-Charles Cachon, a professor of strategy in Laurentian’s school of commerce, said the market has dipped because the Chinese government is buying less metals right now.
That’s because they’ve stockpiled a lot of metals over the last five years. “If they stop purchasing, then it has a huge impact on prices,” Cachon said. “My understanding is this is what’s happening right now.”
But Dave Robinson, an economics professor at Laurentian, said he thinks nickel prices are going to go back above their current levels quite soon. “I can’t see them staying down,” he said. “The long-run story is we’re going to get high prices.”
Even though China isn’t buying as many metals right now, they’ll eventually have to start, as the country’s population is rapidly growing and also becoming more urban, Robinson said.
“They’re building freeways, they’re building super-fast trains, they’re building cities,” he said. “They have a population that’s still about half rural, and it’s expected to go to something like 80 per cent urban by 2050.”
Cachon also said he thinks the dip in nickel prices won’t last long.
“Well, my understanding is that it’s relatively similar to what happened a few years ago when prices went down and back up, basically,” he said.
“It’s a temporary situation in the middle of a long trend in high prices and relatively low supply. (The drop in prices is) going to last maybe a few months, but it’s not part of the general trend that we are witnessing.”
Still, financial reports from mining companies operating in the Greater Sudbury show worrying trends.
Vale reported July 25 that it earned $2.662 billion in the second quarter of 2012, down 58.7 per cent from a year earlier. Net income at the company has hit its lowest level in more than two years.
Xstrata, the city’s other large mining company, reported Aug. 7 that its first-half net income fell to $1.94 billion from $2.92 billion in the year-earlier period.
Smaller mining companies operating in the city are also being affected.
KGHM International Ltd., which purchased what was formerly Quadra FNX, said in an Aug. 13 report that second-quarter profit fell 35 per cent partly because of losses at its Canadian mines.
On Aug. 15, First Nickel reported an operating loss of $2.4 million for the six-month period ending June 30, and an operating income of $100,000 for the second quarter of 2012.
However, the president and CEO of First Nickel, Thomas Boehlert, said in a press release that its Lockerby Mine, which the company recently brought back into full production, had a “very solid second quarter.”
He added the company is “monitoring the recent weakness in nickel prices, and will take the actions necessary to best protect shareholder value.”
Liberty Mines, which operates mines in the Timmins area, announced Aug. 14 that it is halting production temporarily because of the depressed nickel prices.
Robinson said smaller mining companies are the most likely to suffer because of the dip in nickel prices. He said more could suspend production in the near future.
“They’re generally higher cost, because they’ve already been abandoned by Vale or Inco, or they’re new, and bringing things online, and that is costly,” he said.
Robinson, though, advises small mining companies in the process of developing new mines to stay the course, regardless of the current commodity prices, because the market is going to improve soon.
It’s unlikely they’ll be able to take his advice, though.
“It is true that the mining industry sort of has this panic reflex,” he said.
“If the prices drop today, they tend to stop doing their projects for two years out. The money is either flowing madly or not there.”
As for Vale and Xstrata, Robinson said he thinks nickel prices would have to get down to $4 a pound before any major problems would arise.
The nickel mines in Sudbury aren’t the cheapest to operate in the world, but they aren’t the most expensive, either, Robinson said.
It’s also difficult to shut them down, because they require so much maintenance even if they’re not in production, he said.
With the current conditions, the most he could see happening with these companies is a slowdown in production.
“But we haven’t crossed that line yet, and I think it’s a while before we do.”
Vale and Xstrata could decide to shut down their Sudbury operations and shift their focus to holdings where costs aren’t as high, such as open pit mines, Cachon said.
“If they do have other operations that are less expensive to operate, they will choose between producing in Sudbury or in other places,” he said.
However, Cachon said he’s not sure either company has enough low-cost nickel mines elsewhere to keep supplying their clients.
“The production level in Sudbury is so high that you still need it to satisfy the clients to have enough production,” he said. “Sudbury is still one of the major producers in the world.”