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Brazil project, others could spur nickel surplus.

Fri Jul 8, 2005 04:00 PM ET

VANCOUVER, British Columbia, July 8 (Reuters) - The planned startup of a large nickel project in Brazil in 2008 could lead to a surplus of the metal if other miners also go ahead with mines they have on the drawing board, a Canadian-based analyst said.
Cia Vale do Rio Doce (RIO.N) , or CVRD, the world's biggest iron ore miner, announced this week it will branch into the nickel business by developing its Vermelho project into a 46,000-tonne-a-year mine.

Nickel, which is an important ingredient in stainless steel, has been in short supply for the past two years propelling prices higher but also encouraging miners around the world to work on launching new production.

Ian Howat, an analyst at National Bank Financial, said that at least 180,000 tonnes of new financed and committed capacity is set to come on stream between 2007 and 2009.

At least four companies, Anglo American Plc. (AAL.L) , Lionore (LIM.AX) , Canico (CNI.TO) and Dynatec (DY.TO) with its partner Implats (IMPJ.J) , also have projects in the works for that same time period.

The market could have an oversupply problem for several years if these ventures, which would add another 100,000 tonnes of supply, were all given the thumbs up by company boards.

"This announcement (by CVRD) should focus the market on the 2008-2009 period and the potential for an oversupply situation, especially if there is an economic slowdown that dampens demand," Howat said in a research note.

He said that some of the smaller "wannabe" players might get squeezed on financing and choices for partners, especially on the customer side.

This could be especially negative for Canico and its Onca-Puma project in Brazil, but also for Dynatec and other smaller or less-advanced projects led by Weda Bay (WDA.TO) , Skye Resources (SKR.V) and Jaguar Nickel (JNI.TO) .

CVRD had been a potential partner for Canico but with its new project that now looks less likely, Howat said.

Russia's Norilsk Nickel (GMKN.RTS) is the world's biggest producer followed by Canada's Inco Ltd. (N.TO) and Falconbridge Ltd. (FL.TO) . Once BHP Billiton (BLT.L) completes its takeover of Australia's WMC Resources (WMR.AX) it will take the No. 3 spot.