May 2004

Harvest time for Inco as nickel price doubles on booming demand

Times have changed for one of the world's leading nickel producers as supply shortages drive nickel prices ever upwards. Inco's Chairman Scott Hand was in ebullient form as he reported the first quarter results last month…

With first quarter earnings trebled over last year's figure at nearly $230 million, Scott Hand could be forgiven for smiling. "These are exciting times at Inco," he said.

"We're in the midst of one of the strongest nickel markets we've seen in over a decade. We're undertaking the biggest growth program in our history. And we're major participants in one of the most dynamic world markets to emerge in our lifetime - China.

"We have the nickel industry's best marketing position - both what we sell and where we sell. And we plan to expand by 40 per cent in the next few years into a market that will need more nickel in the years ahead.

"At Inco, it all starts with nickel, and our strong belief in nickel as the number one base metal. In recent years we've maintained our strategic focus on nickel. And that focus is now paying off - we have announced adjusted first quarter earnings of $229 million - more than three times our earnings in the same quarter last year.

"Those results reflect the great market we're seeing, with London Metal Exchange nickel prices averaging $6.68 this past quarter - the third highest in our history.

"Today's strong nickel market is no flash in the pan. Over the past year we've seen the LME cash nickel price double. We believe - and many others agree - that nickel prices will remain strong. The reason is simple: there's not enough nickel to meet underlying demand."

How did this situation come about? Mr Hand said that during the 1990s, the collapse of the economy of the former Soviet Union released several hundred thousand tonnes of production capacity to the Western World.

"Meanwhile, the Australians were announcing with great fanfare their new laterite nickel projects. And closer to home, there were great expectations around the development of Voisey's Bay. In anticipation of all this new volume, the mining industry held back on investing in new nickel capacity.

"As it turned out, the Australian laterite projects delivered only a fraction of the production they promised. Voisey's Bay was delayed and all of the Russian capacity has been fully absorbed by the market.

"In the meantime, world demand for nickel has continued to grow steadily, and has picked up momentum. Last year, nickel demand was up by 7 per cent. This year, we believe that insufficient nickel supply will cap nickel demand growth at about 3 per cent - but if there was more nickel available, demand would be much higher.

"Consumption has been rising in Asia, including China. Chinese nickel consumption rose by more than 20 per cent in each of the past four years. Last year, it was up by nearly 40 per cent, and we expect it will rise another 20 per cent in 2004. But for the first time in three years, China is not expected to be the only key driver of growth in the nickel market. Current economic indicators show a moderate to strong recovery in the Western economies for 2004.

"We expect that the US, Japan and Europe, which together make up almost two-thirds of global nickel demand, will contribute to demand growth in 2004. This year, we believe we will see the world nickel market firing on all cylinders.

"Over the next few years, actual nickel demand will be limited by available supply, as supply growth is not expected to rise significantly before our Voisey's Bay and Goro projects come on stream in 2006. The inevitable result? A very tight nickel market and continuing pressure on prices. That said, how do we see the market beyond 2006?

"We expect that the growth rate we've seen in China will level off, but it will still remain strong. Combine that with a recovery in the traditional industrial economies, and nickel demand should continue to be robust.

"During Japan's long period of industrial expansion between 1960 and 1974, nickel demand grew at an average rate of 7 per cent per year for 14 years.

"China's current industrial expansion could prove to have a much bigger impact on demand for metals than Japan's industrialisation. Just imagine what this could do for nickel!

"Even at historical growth rates of 4 per cent annually, it will take the equivalent of a new Goro project every year to satisfy the ongoing nickel demand growth. Let me stress that in the tight market we see today - and we expect for some time to come - we're doing everything we can to satisfy our customers' needs.

"We're known in more countries for nickel than any other producer. To the world, we are truly nickel's champion. As new markets for nickel have developed in Asia, Inco has been there. We launched our first Asian joint venture in Japan in the mid-60s, just as the Japanese stainless steel industry was taking off. In the 1980s, we built our presence in Taiwan and Korea as they were developing their stainless steel industries.

"And while other companies scramble today for a foothold in China, we've been there for over a decade.

"We've built relationships and strategically developed an "on the ground" presence both through our sales network and joint venture operations. The latest is our nickel battery foam plant at Dalian, China, which gives us the advantage of local participation in Asia's growing battery market.

"We're also nickel's champion when it comes to products and applications. Our strength is not just where we sell, but what we sell. We've done more than any other nickel company to develop new nickel products and applications. For Inco, nickel is not just a commodity. We also focus on value-added and specialty products - which consistently earn us premiums above the LME nickel price over the cycle."