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24 NORILSK NICKEL • ANNUAL REPORT •252005MMC NORILSK NICKELNOT INCLUDING GOLD MINING ASSETS (POLUS)8••• Review of marketdevelopments8.1NickelThe Group's principal product is an extremely versatile metalwith an extensive range of applications. Although sometimesused on its own, nickel is more commonly used in a combinationwith other metals in the form of an alloy.The biggest use of nickel is as an ingredient in stainless steel.This accounts for around two-thirds of its total use. More corrosionresistant and shinier (therefore easier to clean) thannormal steels, stainless steels are widely used in various industriesand production of consumer goods.Other important uses of nickel are in special alloys, electroplatingand chemicals. Superalloys incorporating nickel in acombination with chromium, aluminium, titanium and cobaltare, for example, used in aeroengines because of their abilityto tolerate high temperatures without deforming.Nickel first useHowever, with the industrialization of Asia and the rise inincome levels which has accompanied this, countries such asChina, India and South Korea have been rapidly increasingtheir production and their use of stainless steel.Growth in China has been especially impressive. Having producedonly 0.2 million tonnes in 1999, China's production ofstainless steel in 2005 rose to 3.3 million tonnes, representinga growth rate of 60% a year. Over the same period, itsuse of nickel rose from under 40,000 tonnes to almost 190,000tonnes, giving it 14% of world's nickel demand. By way ofcomparison, China's share of the world market for copperand aluminium is 22%.China's share of world metal markets(%)8MMC NORILSK NICKEL NOT INCLUDINGGOLD MINING ASSETS (POLUS)Source: IISI, WBMS, CRU, 2005Source: Nickel Institute, 2005The use of nickel has generally been concentrated in the moreadvanced industrial economies of Europe, North America andJapan.There is also significant potential for the non-stainless applicationsof nickel. For example, strong growth in the market forhybrid electric vehicles (HEVs) which typically employ nickelmetal hydride batteries for their electrical power.The strong growth in demand for nickel in recent years hasstretched the capacity of producers to supply the market andprices have risen to – and have remained at – what are historicallyhigh levels.These economies remain an extremely important market fornickel. Europe is the world's largest nickel market, accountingfor around a third of the global use of the metal. It isalso Norilsk Nickel's largest market.
26 2005 NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •200527Nickel price, 1980–2005(US dollars per tonne)Source: London Metal ExchangeAbout one half of the supply of nickel comes from secondarysources (i.e. scrap). Nickel is an eminently recyclable metal, andnickel-containing stainless steel scrap is typically used in stainlesssteel production. Thus, it ensures a solid demand in developmentof nickel deposits and primary metal production.In the past, the greater part of the world's nickel productioncame from ore deposits in which nickel was found in combinationwith sulfur (the source of nickel sulfides), as it is atNorilsk. However, lateritic deposits containing oxidized nickelaccount for the largest proportion of the world nickelreserves. To date, most of the known large sulfide deposits inthe world have been developed, and an increasing part offuture production is likely to have to come from ore depositsin which nickel is found in combination with oxygen.Nickel production resourcesSource: CRU, 2005Although nickel oxides are plentiful in nature and miningthem is relatively straightforward, processing tends to be morecomplex and more energy-intensive than with sulfides and, typically,oxides require larger amounts of capital to bring themto production.This shift in the emphasis of nickel production from sulfidesto oxides appears to be raising the cost of entry into the nickelbusiness, suggesting the need for attractive prices in thefuture to ensure that the production necessary to balance themarket is forthcoming. Norilsk Nickel's good fortune is thatit possesses what is believed to be the world's largest depositof nickel sulfides, providing a basis for low-cost production formany years to come.Review of nickel market developments in 2005In 2005, the average annual London Metal Exchange (LME)price of nickel increased by 6.4% when compared with 2004,and amounted to USD 14,733 per tonne, which is anotherrecord.SupplyTechnical problems and strikes led to significant losses in primarynickel production, which, coupled with moderate demandfrom stainless steel producers, generally balanced the globalnickel market by the end of the year.The Group expects that the high load rate of the existing productionfacilities and careful policies pursued by producers inincreasing output, together with stable industrial demand,will contribute to the sustained high level of global prices.Average annual nickel price(US dollars per tonne)2005 2004 2003Nickel 14,733 13,852 9,640Source: London Metal ExchangeNickel prices on the London Metal Exchangein 2005(US dollars per tonne)Palladium and platinumThe Group is one of the world's leading producers of platinumgroup metals (PGMs). PGMs are six metals with similar characteristicswhich normally occur together in nature. The mostcommercially important of these are platinum and palladium.The Group's production is predominantly palladium.Palladium has historically been viewed rather poorly when comparedto platinum, and traded at a significantly lower price.Because its production comes mostly as a by-product of therecovery of other metals (notably nickel and platinum), its supplyhas often run ahead of the market's capacity to absorb it,leading to the accumulation of significant stockpiles.However, things are changing, and palladium is increasinglyfinding a role in its own right. Global demand has been growingat over 5% a year and the stockpiles are being worked off.A major factor behind this strengthening in demand is palladium'susefulness in helping to meet ever more stringent environmentalstandards.The control of vehicle emissions requires that cars and trucksbe fitted with catalytic converters or "autocatalysts" as theyare often called. The principal emissions that need to be controlledare carbon monoxide, nitrous oxides and unburnedhydrocarbons. Today's catalytic converters invariably employplatinum and/or palladium; indeed this is the single largest useof both metals. Rhodium, another PGM produced by NorilskNickel, is also used in some types of catalysts.Palladium end usesMMC NORILSK NICKEL NOT INCLUDINGGOLD MINING ASSETS (POLUS)8DemandSource: London Metal ExchangeWorld-wide nickel consumption did not change significantly,amounting to 1.3 million tonnes in 2005. The reduction inEuropean consumption was offset by growth in other regions,mainly in China. Reduction of nickel consumption in stainlesssteel production industry in the third quarter was significantlyoffset by the growth of demand in other sectors. Despite thelag between actual consumption and the forecast data,significant investment demand for the metal was observedthroughout the year.Source: GFMS, 2005
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