Norilsk Nickel Urges Output Cuts From Other Miners --Update

By Alex MacDonald

LONDON--Norilsk Nickel Mining & Metallurgical Co. (NILSY), the world's largest nickel producer, is urging other nickel miners to consider cutting production in response to the low price environment, but said it won't contribute to those cuts.

The Russian nickel producer, which also produces palladium, platinum and copper, estimates that about 70% of the world's nickel production capacity is currently loss-making, but only 17% is at risk of shutting down even though the nickel price hit a 12-year low in February and is still down 37% over the past year.

"We do hope that...this year there will be serious discussions at management and boardroom [levels] as to how they should react to the market, because for us there should be some response from the industry" to the price drop, said Sergey Dubovitskiy, Norilsk's head of strategy. But "given our lowest cost position on the cost curve, this shouldn't be us," he told The Wall Street Journal in an interview on Tuesday.

Neverthless, Norilsk expects nickel output from its core Russian operations to drop to between 206,000-212,000 tons this year from 224,000 tons last year due to the closure of an aging nickel plant and a shift toward nickel-refining operations in Western Russia.

As the world's lowest cost nickel producer, Norilsk produces nickel effectively at no cost since it is able to use the proceeds from the sale of by-products, such as platinum and palladium, to more than offset the cost of producing nickel.

Nickel has been the worst-performing industrial metal this year because of massive stockpiles that accrued before Indonesia imposed an export ban on nickel ore in early 2014. Slackening demand in China, the world's second-largest economy, has also taken its toll on nickel demand growth. The combination of the two means that prices will remain low for the remainder of the year even as the global market slips into a supply deficit for this year and next.

Mr. Dubovitskiy expects nickel prices to begin recovering thereafter as demand growth outstrips supply.

Nickel miners have held back on cutting production longer than expected due to nickel price volatility, which makes it harder to gauge future pricing. "In this type of environment it is really hard to take the big decisions," Mr. Dubovitskiy said. There also has been defiance from some diversified miners to cut costs since they are able to cross-subsidize their operations, while other miners receive government support to avoid shutdowns and job losses. Some mining companies are still ramping up production to benefit from lower unit costs through greater economies of scale, Mr. Dubovitskiy said.

Norilsk Nickel is working to reduce price volatility in the palladium market by launching a fund that is able to purchase up to $200 million of the precious metal from hedge funds and other speculators. The palladium fund, launched in February but still in pilot phase, is designed to stabilize pricing in the market for palladium, of which Norilsk is the largest producer. There are no plans to introduce a similar fund to mitigate price volatility in the nickel market, Mr. Dubovitskiy confirmed.

Separately, Mr. Dubovitskiy said he wasn't concerned about electric-car demand growth. Such growth "might be quite impressive but...in [a] 10-year period, we don't think it would cannibalize much palladium consumption in catalytic converters," he said. Electric cars have no need for catalytic converters, which contain palladium and are used in gasoline-fueled cars to reduce pollution.

In fact, he said demand for gasoline-fueled cars is forecast to continue growing at a healthy rate in years to come. Moreover, Norilsk also benefits from electric-car sales since vehicles, such as those produced by Tesla Motors Inc. (TSLA), contain 80 kilograms of nickel, he noted.

Write to Alex MacDonald at [e-mail]

(END) Dow Jones Newswires

May 17, 2016 12:46 ET (16:46 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.