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[Frank Pembleton]

Inco's Strike Affects Nickel Industry
Interview by Robert Graham

A strike at Inco, the world's second largest nickel producer could turn into a 4 to 6 week disruption. And with low global inventories, that could have a major impact on the stainless steel industry, says CIBC World Markets Base Metals Analyst Stephen Bonnyman


Transcript
IC: The second biggest nickel producer in the world has got a major problem on his hands.
More than 3,000 workers at Inco operations in Sudbury are on strike.

Joining us to discuss the implications of the dispute is Stephen Bonnyman, metals and minerals analyst at CIBC World Markets. Inco is among the companies that he covers.

What’s your view of this dispute? I know we’re just a few days into it, but what’s your feeling about how long it may last?

Bonnyman: Our view at this point is that we probably got at least a four- to six-week work disruption ahead of us.

The discussions that the company is having, in effect, they’re not even occurring this week, which gives you an idea of the time frame that we’re looking at in front of us are going to be fairly tough ones.

Views of the pension and a number of pensioners involved and the aim that the company is headed in trying to reduce its cost over the last few years are going to create some rocky challenges for them to get over.

IC: Inco is the world’s number-two nickel producer. How much of the world’s supply of nickel comes from Inco?

Bonnyman: The Sudbury operations, which are the affected operations that we’re talking about at Inco, were destined to produce about 230 million pounds of production this year.

And that accounts for a little under ten percent of the total world production.

IC: When you take a sizeable chunk of the production pie off the market fairly abruptly like what has taken place, there is an immediate impact, isn’t there?

Bonnyman: Well, we’ve certainly seen that on the London Metals Exchange nickel price (yesterday) that jumped up roughly 40 cents a pound to about $4.20 plus.

So clearly, we are seeing the tightness of the market being reflected there. From a consumer standpoint, whether nickel comes out of inventory or whether it comes straight from the producer, is largely irrelevant.

The challenge at this point in the market is that global inventories are sitting at relatively low levels.

And that’s going to mean that if we continue in a fairly robust nickel demand environment, we could end up seeing some very serious shortfalls and the potential for higher prices.

IC: Are you saying, Stephen, that if this thing really drags on, that you and I as consumers will notice it?

Bonnyman: It’s unlikely we’ll recognize it as end use consumers, but certainly stainless steel producers will notice it.

Nickel by weight accounts for between seven and nine percent of the mass of any tonne of stainless steel and can account for upwards of 30 and 40 percent of the total cost.

Clearly, as nickel prices move up, the stainless steel producers get hit because for the most of us in consumer products, stainless steel accounts for a smaller proportion of it.

Yes, it will flow through, but we won’t be able to recognize it directly as such.

IC: Why are world supplies so tight right now?

Bonnyman: A combination of a lack of new development, developments that have failed and continuing growth in the market.

I mean, stainless steel is actually really an extraordinary metal in its ability to handle high temperatures, to handle heat and the fact that it doesn’t oxidize or rust, as many other metals do. And that puts it very attractive for a lot of applications.

IC: Is it more or less immune to economic conditions because you’re talking about a very strong demand at a time when on a global scale, the economy is chockfull of worry and concern.

Bonnyman: Not at all. In fact, it’s highly sensitive to economic conditions, but when we talk about economic conditions from a metal standpoint, we really have to look globally and the kind of industrial production that’s taking place in Asia and most notably China over the last few years has been a major engine of growth for the nickel market, absorbing lots of product.

IC: Ahead of this strike, did Inco have much of a stockpile?

Bonnyman: Traditionally, Inco would try and build up as much of a stockpile as it could.

Back when they had their last strike in Ontario in 1997, the company had secured about 73,000 tonnes of nickel in various locations so that it had product to deliver against contracted sales.

The problem this time around is with the market being tight and having had a series of production challenges in their own right last year, they only have about 24,500 tonnes available.

IC: I understand that if this goes let’s say three weeks, the difference between three weeks and five weeks or six weeks is quite major. In a previous conversation that you and I had, you spoke of having to retrain the workers in some areas.

Bonnyman: Well, there’s a variety of issues that pop up, the longer the strike goes on.

First and foremost, in the near term with 24,000 plus tonnes, Inco will be able to meet all of its contracted deliveries in the near term.

If the strike should continue much beyond that, then they start having to source product either in the markets, buying nickel to deliver against the contracts, or simply declaring force majeure and indicating that they cannot meet those commitments.

Additionally with safety regulations, if workers are off for a substantial period of time, it also triggers a whole series of other activities involved, such as retraining a staff, safety training and things like that as required under health and safety law.

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