BHP Billiton Ltd's surprise decision to shut an Australian nickel smelter and refinery for about four months for repairs, cutting global supply by 2 percent, drove nickel prices to a 3-week high on Thursday.
BHP said it had to repair the furnace at its Kalgoorlie nickel smelter a year earlier than planned because it had become unsafe to run. The closure will also halt production at BHP's Kwinana refinery, which takes its feed from the smelter.
Three-month nickel futures rose 6 percent in London Metal Exchange electronic trading to $24,585 a tonne, the highest since May 22.
We're seeing a knee-jerk reaction to a cut in supplies, which is not unexpected given the relatively small size of the global nickel market, said David Moore, commodities strategist for Commonwealth Bank of Australia.
But demand has tapered off dramatically in the last year, so the overall impact is probably less than it would have been in a healthier market, Moore said.
The shutdown of Kwinana would cut nickel sales by 25,000 tonnes in the year to June 2009, and by 3,000 tonnes for the current year to end-June, BHP estimated. Sales in the year to June 2007 were about 101,000 tonnes.
The Kalgoorlie smelter produces around 100,000 tonnes of nickel-in-matte a year. BHP shares closed 3.8 percent lower at A$41.80.
Nickel prices have dropped more than 10 percent this year as stainless steel makers, which consume around two-thirds of the world's nickel, scaled back purchases in light of slowing demand for their products.
BHP said it was trying to concentrate production at mines near the smelter while the two plants were idle.
Some analysts said the rebuild may have been brought forward because the smelter had been run hard.
This is what happens when demand is strong, said Peter Chilton, an analyst at Constellation Capital Management.
Independence Group, which supplies nickel ore to BHP, said it was trying to get more information from BHP. Another supplier, Mincor Resources, said BHP had told it there would be no impact on Mincor.
The shutdown has freed up gas supply for BHP's Worsley Alumina refinery, one of the operations hit by a power shortfall earlier this month when an explosion at a gas plant operated by Apache Energy cut about a third of gas supplies to Western Australia, the country's biggest mining state.
BHP has designated nickel a high growth business, spending billions of dollars on new projects and shouldering massive cost overruns to raise its profile in the sector.
Chief Executive Marius Kloppers has also used nickel as an example of where it believes rival Rio Tinto Ltd/Plc lacks a presence. BHP has launched a hostile $180 billion offer for Rio.
It will be at least two years before BHP's new Ravensthorpe nickel mine, also in Western Australia, is at full capacity of 50,000 tonnes a year following a battery of delays and $1 billion in unseen construction costs.
The project, which started production in 2007 about nine months behind schedule, has cost about $2.2 billion to build and is one of the largest nickel-making facilities in the world. In May, the project was running at little more than a third of capacity and is unlikely to reach maximum production runs until 2010. (Additional reporting by Ben Wilson in SYDNEY and Nick Trevethan in SINGAPORE; Editing by Ian Geoghegan)
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