Inco deal may send nickel prices up

FALCONBRIDGE TAKEOVER Merged firm would control quarter of global nickel trade

Inco’s move to become the world’s largest nickel producer could lead to higher prices for nickel, although the price of other metals will not be affected for now, analysts said yesterday.

On Tuesday, Inco Ltd. made a $12billion friendly takeover offer to acquire former rival Falconbridge Ltd. Currently, Russian

firm GMK Norilsk Nickel is the largest supplier of nickel in the world, but if the Falconbridge deal is approved, the new Inco would supplant Norilsk and control roughly a quarter of the global nickel trade.

“It has to be a plus for prices, especially for nickel as it concentrates the market in fewer hands,” said Stephen Briggs, an analyst at SG Corporate and Investment Banking.

If the deal goes ahead, it would concentrate almost 45% of the world’s nickel output in the hands of Norilsk and Inco.

“ It’s bad for the consumer long term ... there will be less competition and higher prices,” Mr. Briggs said. Nickel is used to make chemicals, batteries and coinage, but more than two-thirds of the world’s nickel is used in the creation of stainless steel.

Mr. Briggs pointed to the example of iron ore, one of the most profitable sectors in mining, where only three firms control 80% of the market.

After starting the year strong, nickel prices fell 5% in September because of reduced Chinese demand for stainless steel. Nickel was trading at $12,750 per metric ton on the London Metals Exchange yesterday, well off a high of nearly $17,000 it hit in May. Inco’s consolidation move could reverse that trend and stabilize nickel prices.

But copper, zinc and led, which are all trading at 52-week highs in London, will not see prices affected because those industries are too fragmented, Salman Partners Inc. analyst Ray Goldie said.

Mr. Goldie, who has written a book on Inco, says the company might be trying to boost its share of the nickel market to stabilize prices.

“[In 1987,] Potash Corp. decided it would engage in supply-management to stabilize prices, and since then they’ve been very successful in keeping prices fairly constant,” Mr. Goldie said.

“ At the time Potash had [less than a third] of the market, so that shows you have to have something around 30% before you can start managing the market,” he said.

Even after the merger, Inco would not quite control that much, but with new operations launching soon, Mr. Goldie expects they will control more than 30% in the near future.

He also points to the example of the aluminum industry as an indicator of what might be in store for nickel.

“In the last five years we’ve seen the aluminum business be very disciplined about not re-opening shut down capacity when prices rose,” Mr. Goldie said. “ Alcoa has the most shut down capacity of anyone and even they’ve generally resisted re-opening it.”

Despite the fact that Falconbridge is a sizable player in copper, zinc and aluminum, Mr. Goldie suggested, Inco might be interested in divesting itself of some of those assets and becoming a pure nickel company.

“Inco is well aware that the Canadian market pays a premium for pure plays,” he said. “By merging with Falconbridge, they’re taking a company of which about 80% of revenues were derived from nickel, down to around 50%. So Inco will be very tempted to sell off some businesses.”

Mr. Goldie said even though Norilsk now faces a huge competitor in the new Inco, even it could benefit from Inco’s move if the company were able to manage nickel prices.

“ They’re probably happy that Inco is going back to what it was in the 1970’ s when it could stabilize prices,” he said.