Tag Archives: Nickel Industry

THE SHERRITT–CUBA JOINT VENTURE: UNCERTAINTIES FOR BOTH PARTNERS

By Arch Ritter  

September 6,  2016

Cuban nickel production and the Sherritt-Cuba joint venture should have good prospects in view of Cuba’s large and low-cost reserves of nickel. Sherritt’s technology and probable future demand.  However, there are a number of looming issues that darken the horizon for Sherritt and to a lesser extent for Cuba including high transportation costs – shipping nickel/cobalt concentrate from Cuba to Fort Saskatchewan Alberta – together with the “Helms-Burton” status of the mine, and future price levels and volatility..

The Moa mine and processing facility, with a 25,000 ton capacity, were initially constructed by US interests – the Moa Bay Mining Company, a subsidiary of Freeport Sulphur. They used proprietary technology from Sherritt, which had pioneered hydrometallurgy processes at their plant in Fort Saskatchewan Alberta. Extraction and processing began in 1959.

The Government of Cuba then expropriated the operation without compensation in August, 1960 and restarted it in 1961 producing concentrate for the Soviet Union.  The US Foreign Claims Settlement Commission (US FCSC) valued the company at US$ 88.4 million at the time of the expropriation.

Sherritt’s direct connection with Cuba began in 1991 with purchases of Cuban nickel concentrate for its Alberta refinery.  Sherritt had had insufficient volumes of concentrate for many years and in 1990 a refining contract with INCO expired. In 1994, Sherritt International and the Compania General de Niquel of Cuba established a 50/50 joint venture, which now owns the Moa extraction, processing, and smelting operation, the Alberta refinery and the international marketing enterprise. The former President of the company, Ian Delaney, also negotiated agreements with the Cuban Government, permitting Sherritt to enter other sectors of the economy, including electric energy, oil and gas, agriculture, tourism, transportation, communications, and real estate. By 2000, Sherritt International had become a major diversified conglomerate in Cuba.

In this deal, the Cuban Government became and is currently a foreign investor in Canada, as the Compania General de Niquel owns 50% of the nickel refinery, a fact not well known in either Cuba or Canada.

The joint venture between Sherritt International and the Government Cuba is a cooperative masterpiece.  It has generated great benefits for both parties.

 I.         The Nickel/Cobalt Operation

The linking of the Moa nickel deposit and part of Cuba’s processing capacity with the Alberta refinery and its access to attractive energy sources was a stroke of genius and/or good luck for Sherritt and Cuba.

Cuba acquired a market for its nickel concentrate. It acquired access to the technological improvements that have occurred from 1959 to 2016.  These have generated improvements in productivity, energy efficiency, environmental impacts, and health and safety.  It acquired Sherritt’s managerial know-how which. Together with technological improvements, have increased production from around 12,500 tons in the early 1990s to around 34,000 tons in the 2010s.zzzzz3The Government of Cuba is now the joint owner of a vertically integrated nickel operation, from extraction and concentrating through to refining and international marketing. Cuba also has obtained new technologies and managerial skills for oil and gas extraction and utilization, as well as electricity generation.  Cuba’s nickel reserves are fifth largest in the world and production volumes are 10th largest.[i] Nickel has been Cuba’s largest merchandise export since the collapse of sugar by 2002. Foreign exchange earnings from the Sherritt-Cuba joint venture’s share of nickel and cobalt exports have averaged about 40% of total nickel/cobalt exports.

It is not surprising that Ian Delaney became known as “Fidel’s Favorite Capitalist”!

For its part, Sherritt has been able to maintain its Canadian refinery and to use its base in nickel to enter other sectors in Cuba. Its earnings from its Cuban operations are significant. The joint venture has been able to increase metal production and achieve high net operating earnings, which have been in the area of 40 to 50 percent of the company’s gross revenues for most years, depending on international nickel prices.  The following chart illustrates Cuba’s total nickel production volumes.  The impact of Sherritt’s innovations in increasing production volumes in the second half of the 1990s is apparent.

 II.        Petroleum, Natural Gas and Electric Power

Sherritt International’s petroleum and natural gas activities also have been successful. New sources of oil and gas have been discovered and extraction rates have increased through enhanced recovery techniques from 1996 to 2000. Natural gas recovery and utilization has also been improved through the construction of two processing plants, a feeder pipeline network, and a 30 Kilometer pipeline to Havana (Sherritt International, Annual Report, 1997, 13).

Sherritt invested CDN $215 million for the construction of two integrated gas processing and electrical generation systems. The natural gas feedstock previously had been flared and wasted. Commissioned in mid-2002, these operations had a combined capacity of 226 megawatts and generated a significant proportion of Cuba’s electricity. At the same time they reduced sulfur emissions, a potential problem especially at the Varadero site, which is adjacent to the hotel zone. By 2007, installed electricity generation capacity had been further increased to 375 mega watts, following an 85 MW expansion that came on stream in early 2006.

In February 1998, Sherritt acquired a 37.5 percent share of Cubacel, the cellular telephone operator in Cuba for $US 38 million, but this was resold. “Sherritt Green,” a small agricultural branch of the company, entered market gardening, cultivating a variety of vegetables for the tourist market. Sherritt also acquired a 25 percent share of the Las Americas Hotel and golf course in Varadero and a 12.5 percent share of the Melia Habana Hotel, both of which were managed by the Sol Melia enterprise but these also have been divested.  By 2010, Sherritt’s Cuban operations were large and growing. Gross revenues reached CDN $1,040 million in 2008.

 III.      Energy Costs, Transport Costs and Potential Relocation

However, there are a number of clouds on the horizon for Sherritt. First, Cuban nickel concentrate is transported by ship to the east coast of Canada and then overland to the Alberta refinery. This makes some sense economically when energy prices are low.  So far, the existence of the refinery there has compensated for high transportation costs. However, if – or when –transportation costs rise with higher energy prices or when full normalization with the United States occurs or when the existing plant reaches the end of its useful life, would a different location become more attractive?   Energy sources are also available in Venezuela as well as the Gulf of Mexico region of the United States or could be transported to Cuba itself in future.  At some point it will likely make sense to relocate a refinery to a locale closer to the nickel ore body.

 zz3

So far, Cuba is tied to the Canadian location through its 50% joint ownership of the Alberta refinery. But would Sherritt relocate the refinery to a lower-risk Cuba at some time in the future, or to the post-embargo United States or a post-Maduro Venezuela?  Perhaps. However, Alberta will continue to have competitive energy prices and low risk to compensate for its locational disadvantage for some years to come.

 IV.       “Helms-Burton” Status of the Mine Properties.

The second possible problem for Sherritt is that the Moa mine and the concentration plant are “Helms-Burton” properties for which there are US claimants. What would be the current value of the Using the US FCSC interest rate of 6% per year of non-payment, the 2016 compounded value would be a whopping US$ 2,054.6 million. Obviously there will be a negotiations problem for this and all other such claims.

Resolution of the compensation claims issue with full US-Cuba normalization may require Sherritt and the Government of Cuba to negotiate some sort of compensation package for the original US owners.  In one scenario, the US claimants would simply take over the Cuba-Sherritt operation in Cuba. But this would not be reasonable because at this time, the refinery for Cuban nickel is in Alberta and it is jointly owned by Cuba. My guess, however, is that Sherritt, the Government of Cuba and the US claimants will negotiate an arrangement that will be reasonable for all parties.

In any case, the claim of US interests on the mine property generates ambiguities and uncertainties and will be problematic at some time in the future. Sherritt International may well be one of the few economic interests that perhaps could lose from US-Cuban complete economic normalization. A resolution of the property claims issue may turn out to be very expensive for Sherritt. .

 V.        “Nickel Pig Iron”

A technological advance in the production of “Nickel Pig iron” (NPI), a substitute for refined nickel-steel alloys for some uses where high quality is less necessary.  “Nickel pig iron” may well have already captured a portion of the nickel market for low quality alloys.  In future, it may reduce the demand for nickel thereby placing downward pressures on nickel prices. This will likely reduce and Cuba’s foreign exchange earnings and Sherritt’s revenues and profits from nickel exports in future.

As illustrated in Chart 2, nickel prices spiked in the boom of 2003-2007 – helping to generate a period of relative prosperity for Cuba – then declined in the recession of 2008.  What is striking at this time is that in real inflation adjusted terms, the price of nickel in 2015 and 2016 is pretty much where it was in the 1990s. A number of factors are contributing to this of course, especially the growth rate deceleration in China reducing the demand for nickel.  Is “nickel pig iron” also contributing to weak demand for nickel at this time?  What will be its impact in future?

 zzzzz2

Source: United States Geological Survey, Minerals Information, Nickel: Statistics and information., various years. The “real” or “inflation adjusted” price is the US consumer price deflator.

In conclusion, Sherritt has had a great run in Cuba, contributing to improved nickel production and exports, higher foreign exchange earnings for Cuba and high revenues and profits for itself, especially in the 2004-2014 decade.  The future may be less brilliant for both with the uncertainties of resolving the property claims issue and a possible slow=down in international demand for nickel generated in part by “nickel pig iron.”

[i] United States Geological Survey, Commodity Surveys, Nickel, 2016. http://minerals.usgs.gov/minerals/pubs/commodity/nickel/mcs-2016-nicke.pdf

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Craig Wong of the Canadian Press: “Ian Delaney, Sherritt CEO Retires”

Ian Delaney, CEO of Sherritt International is retiring, but will remain active as Chairman of the board. Delaney’s visionary linking of Cuba’s nickel concentrate production with Sherritt’s unused refinery in Fort Saskatchewan Alberta has been of immense benefit to both Cuba and Sherritt. A fact not widely known inside or outside Cuba is that the Government of Cuba is now a foreign investor in Canada as joint owner of the Refinery in Alberta.

Ian Delaney and Raul Castro Appreciating a Comment

Long-time Sherritt chief executive Ian Delaney to retire, remains chairman

By: Craig Wong, The Canadian Press, November 24, 2011

The long-time chief executive of Sherritt International Corp., who transformed the company by flying in the face of conventional wisdom and betting big on Cuba, is retiring at the end of the year. Ian Delaney, who turned 68 last month, will remain chairman of the Toronto-based miner while Sherritt’s chief financial officer, David Pathe, will replace him as CEO on Jan. 1.

Delaney took over the struggling company — then Sherritt Gordon — in 1990 after winning a proxy battle with the help of Eric Sprott, then-president of Sprott Securities, and Bruce Walter of Delaney Walter & Co. But it was his defiance of the U.S. trade embargo and investment in the Moa joint venture in Cuba that helped Delaney, a former investment banker with a reputation as “the Smiling Barracuda of Bay Street,” make his mark.

Delaney, who was Sherritt’s CEO for much of the last two decades, was often called Fidel Castro’s favourite capitalist. His deal with the Cuban dictator provided the communist country with hundreds of millions of dollars in badly needed foreign exchange in return for mining rights that turned Sherritt into a diversified resources company. Raymond Goldie, senior mining analyst at Salman Partners, said Delaney once pronounced that he wanted to turn Sherritt into the “Canadian Pacific of Cuba,” referring the Canadian railway that once owned coal mines, hotels, ships, and oil and gas assets before it spun them all off. “He bet big on Cuba,” said Goldie, who noted Sherritt would later sell its hotel, mobile phone and other non-core investments in Cuba.

When Delaney took over Sherritt the company was floundering. It had a nickel refinery in Fort Saskatchewan, Alta., but nothing to refine. “Sherritt had a smelter refinery all dressed up and nothing to feed into it,” Goldie said. So Delaney turned to Cuba for supply, a move that Goldie said the company had considered before, but rejected because of the risks involved with angering the United States. The company’s investment in 1994 would eventually lead to Delaney and his family, as well as several top executives, being blacklisted by the U.S. State Department and barred from visiting the United States. “He was brave enough to say ‘I’m never going to set foot in the United States again,'” Goldie said.

While the deal turned Sherritt into a major player in Cuba, it also made him an enemy of some U.S. politicians. “Ian Delaney has made a deal with the devil,” like those who “did business with Hitler’s Germany or Stalin’s Russia,” Marc Thiessen, an aide to Senate Foreign Relations Committee chairman Jesse Helms, was quoted as saying at the time. Helms, the ultra-conservative Republican Senator from North Carolina, was the co-author of the Helms-Burton Act, which tightened U.S. sanctions against foreigners who invest in Cuba. But Delaney thumbed his nose at the insults and in 1996 Sherritt became the first foreign capitalist company to hold a board meeting in Cuba since Castro’s revolution in 1959.

Archibald Ritter, a Carleton University economics professor and expert on Cuba, said Sherritt has been a driving force in the modernization of the Cuban resource sector. “It has been mutually beneficial,” he said. Ritter said Cuba had been relying on old Soviet-era technology, but Sherritt changed all of that with modern technology for mining and drilling for oil that boosted exports and increased production for the country.

Nearly two decades after its initial investment, Sherritt’s Moa joint venture produced 33,972 tonnes of nickel and 3,706 tonnes of cobalt in 2010. The company also owns oil and gas operations in Cuba as well as a stake in power utility Energas, which has power plants across the country with a combined capacity of 356 megawatts.

Since the Cuban deal, Sherritt has also cashed in on the global commodities boom of the last decade, also betting heavily on coal, expanding its operations in Canada beyond nickel and other metals. In 2001, Delaney partnered with the Ontario Teachers’ Pension Plan and acquired the Luscar coal business in Alberta that supplies fuel to coal-fired power plants in Alberta and Saskatchewan. More recently, though, Sherritt has faced difficulties. Its shares (TSX:S) were unchanged in trading Thursday at $5.09, but down from their peak of more than $17 in 2007 during the commodities boom.

In 2009, Sherritt saw an oil production-sharing contract between the Cuban government and Sherritt’s partner Pebercan Inc. (TSX:PBC) scrapped nearly 10 years early after months of efforts to have the Cuban government catch up on missed payments to the company.

Earlier this year, Sherritt extended its work schedule and increased estimated costs for its Ambatovy project in Madagascar. It cited a litany of problems including poor performance by contractors and inaccurate estimates on the project in the island country off the east coast of Africa. The company has said the capital cost of the project will come in at US$5.5 billion, about 16 per cent more than it had previously predicted. In the quarter ended Sept. 30, Sherritt more than doubled its profits to $45.5 million or 16 cents a share. That was up from $22.5 million or seven cents a year ago. Revenues rose to $466.4 million from $412.7 million. Besides its nickel and cobalt operations, the company is the largest producer of thermal coal in Canada. It also is the largest independent energy producer in Cuba, with extensive oil and power operations across the island.

Sherritt, which has more than 6,800 employees and a stock market value of more than $1.5 billion, also licenses its nickel mining technology to other metals companies.

See also:

Bad News for Cuba’s Nickel Industry and Sherritt, June 28, 2010

Does Sherritt International Have a Future in Cuba?, October 20, 2010

From The Cuba Standard: “Piñón on Energy: Analyzing Sherritt”, February 25, 2011

Up-Date on Canadian-Cuban Economic Relations, May 27, 2011

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Mark Frank: “Cuba cracks down on “Guayabera” crime”

One morning this month the nearly half a million inhabitants of Sancti Spiritus, a leafy province in central Cuba, woke up to find their local government had fallen.

Rather than some kind of US-inspired coup, however, the removal and subsequent arrest of five senior provincial officials was part of the increasing drive by Raúl Castro, president, against white-collar corruption – or white “Guayabera” crime as it is called after the distinctive Cuban dress shirt.

The crackdown, launched two years ago, has already cost hundreds of senior Cuban Communist party officials, state managers and employees their jobs and sometimes their freedom, as Mr Castro has struggled to shake-up the country’s entrenched bureaucracy and move the country towards a less centralised and more market-driven economy.

Although such campaigns are not new, the intensity of the current drive is unprecedented, as are the number of high level targets and breadth of their illicit activities, Communist party and government insiders said this week.

As well as Sancti Spiritus’s wayward officials, Havana’s mayor resigned last month after most of the capital’s top food administrators were swept away in another probe.

Last year, in the all-important nickel industry, which exports some $2bn annually, managers from mines and processing plants up to deputy ministers of basic industry were arrested after “diverting resources” and padding export weights, according to industry sources. Yadira García Vera, the minister, was eventually fired.

The drive began in earnest in 2009 when Mr Castro, 84, opened the Comptroller General’s Office, saying it would “contribute to the purging of administrative and criminal responsibility, both the direct perpetrators of crimes and the secondary ones . . . [who] do not immediately confront and report them.”

The move is designed to try and allow state-owned companies to operate more profitably, as Mr Castro wants them to, while also preventing the kind of corruption that marked Russia’s and China’s own moves to the market.

“The creation of the Comptroller General in 2009 was a significant step in the first phase of Cuba’s reform,” said Arturo López-Levy, a former analyst at Cuba’s interior ministry and now a Cuba expert at the University of Denver in the United States.

“East Asia demonstrated the wisdom of creating an anti-corruption agency early in the economic transition from a command economy.”

Cuba is fertile ground for corruption. After 20 years of economic crisis, and with state wages worth around $20 a month – a level that the government admits does not cover necessities – almost all Cubans engage in illegal activities to survive.

At the same time, the government is loosening regulations on small private business even as it cuts subsidies and lays off government workers, thereby requiring more sacrifice from state employees and pensioners.

“Raúl Castro has clearly gone to extraordinary lengths to make it clear that corruption – particularly at the higher levels – will not be tolerated, signalling he means business and higher-ups must sacrifice too,” said John Kirk, a Latin America expert at Dalhousie University in Halifax, Canada.

Cuba does not suffer from drug-related corruption like many of its neighbours, said western diplomats and foreign security personnel who work closely with Havana on interdiction.

Rather, according to foreign investors, the biggest problems they face when forming domestic joint ventures are the long delays starting and then operating a Cuban business – in part due to draconian regulations designed to prevent white-collar crime.

That is not the case in the external sector, where foreign trade and off-shore activities make corruption easier.

“The huge disparities between peso salaries, worth just a few dollars a month, and the influx of strong currencies, even in very small amounts, create extremely strong incentives to become corrupted,” said one western manager, who requested anonymity.

Cuban cigars have become the most emblematic case. Distributors in Canada and Mexico had long complained that millions of valuable “puros” – high quality cigars – were somehow making their way to other Caribbean islands and then being smuggled into their franchised territories.

But it was not until last year that the Cohiba-puffing Manuel García, the long-time vice-president of Habanos S.A., a joint venture with London-listed Imperial Tobacco and the exclusive distributor of the island’s famous cigars, was arrested along with a number of other executives and staff.

“Turns out we were complaining to the very people who had set up the sophisticated operation, complete with shell companies and paths to avoid import duties,” one foreign distributor said.

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Does Sherritt International Have a Future in Cuba?

By Arch Ritter

The joint venture between Sherritt International and Cuba is a cooperative masterpiece that generates great benefits for both parties.  However, when looked at from the perspective of transportation costs – shipping nickel/cobalt concentrate from Cuba to Fort Saskatchewan Alberta – together with the “Helms-Burton” status of the mine, some questions occur as to its long term viability.

The Moa mine was initially constructed by US interests – the Moa Bay Mining Company and expropriated by the government of Cuba in August, 1960. The US Foreign Claims Settlement Commission valued the company at $88,349,000 at the time of the take-over.

Sherritt’s connection with Cuba began in 1991 with purchases of Cuban nickel concentrate for its Alberta refinery.  Sherritt had had insufficient volumes of concentrate for many years and in 1990 a refining contract with INCO expired. In 1994, Sherritt International and the Compania General de Niquel of Cuba established a 50/50 joint venture, which now owns the Moa extraction, processing, and smelting operation, the Alberta refinery and the international marketing enterprise. The President of the company, Ian Delaney, also negotiated agreements with the Cuban Government, permitting Sherritt to enter other sectors of the economy, including electric energy, oil and gas, agriculture, tourism, transportation, communications, and real estate. By 2000, Sherritt International had become a major diversified conglomerate in Cuba.

Sherritt International CEO Ian Delaney and President Raul Castro appreciate a comment.

In this deal, the Cuban Government became and is currently a foreign investor in Canada, as the Compania General de Niquel owns 50% of the nickel refinery, a fact not well known in either Cuba or Canada.

I. The Nickel/Cobalt Operation

The linking of the Moa nickel deposit and part of Cuba’s processing capacity with the Alberta refinery and its access to attractive energy sources was a masterful move and has generated important benefits for Cuba and for Sherritt. Cuba has acquired a market for its nickel concentrate. It acquired access to improved production technologies relative to its older 1950s-vintage US technology and its 1960s-vintage Soviet technology which has generated improvements in productivity, energy efficiency, environmental impacts, and health and safety. The Government of Cuba is now the joint owner of a vertically integrated nickel operation, from extraction through to refining and international marketing. Cuba also has obtained new technologies and managerial skills for oil and gas extraction and utilization, as well as electricity generation.

(Click to enlarge)

The Nickel Refinery at Fort Saskatchewan Alberta, jointly owned 50/50 by Sherritt International and the Compania General de Niquel of Cuba.

Sherritt is able to utilize more fully its Canadian refinery and to use its base in nickel to enter other sectors in Cuba. Its earnings from its Cuban operations are significant. The joint venture has been able to increase metal production and achieve high net operating earnings, which have been in the area of 40 to 50 percent of the company’s gross revenues for most years, depending on international nickel prices.  The following Table presents some information on Sherritt’s Cuban operations, drawn from its Annual Reports.

(Click to enlarge)

II. Petroleum, Natural Gas and Electric Power

Sherritt International’s petroleum and natural gas activities also have been successful. New sources of oil and gas have been discovered and extraction rates have increased through enhanced recovery techniques from 1996 to 2000. Natural gas recovery and utilization has also been improved through the construction of two processing plants, a feeder pipeline network, and a 30 Kilometer pipeline to Havana (Sherritt International, Annual Report, 1997, 13).

Sherritt invested CDN $215 million for the construction of two integrated gas processing and electrical generation systems. The natural gas feedstock previously had been flared and wasted. Commissioned in mid-2002, these operations had a combined capacity of 226 megawatts and generated a significant proportion of Cuba’s electricity. At the same time they reduced sulfur emissions, a potential problem especially at the Varadero site, which is adjacent to the hotel zone. By 2007, installed electricity generation capacity had been further increased to 375 mega watts, following an 85 MW expansion that came on stream in early 2006.

In February 1998, Sherritt acquired a 37.5 percent share of Cubacel, the cellular telephone operator in Cuba for $US 38 million, but this has been resold. “Sherritt Green,” a small agricultural branch of the company, entered market gardening, cultivating a variety of vegetables for the tourist market. Sherritt also acquired a 25 percent share of the Las Americas Hotel and golf course in Varadero and a 12.5 percent share of the Melia Habana Hotel, both of which were managed by the Sol Melia enterprise but these also have been divested.  By 2010, Sherritt’s Cuban operations were large and growing. Gross revenues reached CDN $1,040 million in 2008.

III. Energy Costs, Transport Costs and Potential Relocation

However, there are two clouds on the horizon. First, Cuban nickel concentrate is transported by ship to the East coast of Canada and then overland to the Alberta refinery. This seems to make sense economically at this time low energy prices in Alberta and the existence of the refinery there compensate for high transportation costs. However, if – or when –transportation costs rise with higher energy prices, and when the existing plant becomes obsolete or simply reaches the end of its useful life, would a different location become more attractive?   Low cost energy is also available in Venezuela for example. The Chvez factor is also of relevance. Will a future Cuban post-Raul Government still be enamored of a Chvez or post-Chvez Government in Venezuela? What will be the relative risks of relocating the refinery to another location such as Venezuela?

So far, Cuba is tied to the Canadian location through its 50% joint ownership of the Alberta refinery. Would Sherritt ever accept a transfer of the refinery to Venezuela, if pushed by its Cuban partner?  Perhaps in a more distant future that is difficult to foresee. However, Alberta will continue to have competitive energy prices and low risk for a many years to come.

IV. “Helms-Burton” Status of the Mine Properties.

The second possible problem for Sherritt is that the Moa mine and the concentration plant are “Helms-Burton” properties for which there are US claimants. US-Cuba normalization may require Sherritt to negotiate some sort of compensation package for the original US owners.  In one scenario, the US claimants would simply take over the Cuba-Sherritt operation in Cuba. But this would not be reasonable because at this time, the refinery for Cuban nickel is in Alberta and it is jointly owned by Cuba. To construct another would be costly. My guess, however, is that Sherritt, the Government of Cuba and the US claimants will negotiate an arrangement that will be reasonable for all parties.

In any case, the claim of US interests on the mine property generates uncertainties and will be problematic at some time in the future. Sherritt International may well be one of the very few economic interests that perhaps could lose from US-Cuban economic and diplomatic normalization.

V. “Nickel Pig iron”

As noted in an earlier entry in this Blog, a technological breakthrough in the production of “Nickel Pig iron” (NPI), a substitute for refined nickel is already having an impact on the nickel market and causing reductions in the price of nickel. This technology will likely put a cap on nickel prices in future a as alternate new supplies enter the market. This will likely reduce Sherrittt and Cuba’s foreign exchange earnings from nickel exports in future, and may halt any expansions in nickel nickel mining for some time to come. (See Bad News for Cuba’s Nickel Industry and Sherritt.)

Thus, while the near-future looks as bright for Sherritt International in Cuba as the last 10 years or so, these three issues raise ambiguities about its medium and longer term future – at least in the nickel sector.

Ian Delaney: a Sympatico CEO, it would appear

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Bad News for Cuba’s Nickel Industry and Sherritt

A major technological breakthrough in the production of “NPI”, a substitute for refined nickel mined and concentrated in Cuba – as well as Canada. Russia and Australia – is already having a major impact on the nickel market and causing reductions in the price of nickel. This will probably reduce Cuba’s foreign exchange earnings from nickel exports in future, and will likely halt any expansions of nickel mining for years or even decades to come.

A June 11 2010 report by Andy Hoffman in the Toronto Globe and Mail describes a new product, “nickel pig iron” or “NPI”,  that permits a low cost alternative to nickel with obvious implications for the Cuban, Canadian and international nickel industry. NPI is a low-cost and low-tech innovation in the production of stainless steel, developed since 2006 on China. It now accounts for about 10% of world’s $21-billion-a-year nickel market and is increasing rapidly in China, as indicated in the chart below. It also has a long way to go before it captures a large share of the Chinese nickel market.The emergence of NPI has reduced the demand for smelted and refined nickel from traditional sources and will likely lead to further reductions in future. The peak prices of nickel in 2006-2007 that resulted from the tightening market generated by sustained Chinese economic growth over the last 30 years and the general rapid expansion of the world economy from 2000 to 2007 are likely a thing of the past. The cost of NPI will put a permanent ceiling on nickel prices and perhaps reduce demand and mine extraction for traditional nickel in future.

The new technology is based on the direct smelting via cheap electricity of Indonesian or Philippine ore that contains very low levels of nickel – around 2% – but also around 50% iron ore together with coking coal and a mix of gravel and sand . This produces the NPI that is suitable for stainless steel products.

Hoffman estimates that future prices for nickel will remain below about $8.50 per lb. after peaking at about $24.00 a pound in 2007. This means that Cuba’s foreign exchange earnings will never again reach the approximate $2.33 billion of 2007. More likely they would remain around one third this level and then perhaps diminish if new mine development were to be halted because of sustained low prices and shrinking markets.

But there are some questions about the long term attractiveness of NPI.

  1. Does it produce a high grade stainless steel of consistent quality?
  2. To what extent is the electricity used for the smelting process subsidized?
  3. To what extent does the relative cost competitiveness depend on China’s grossly and obviously undervalued exchange rate?
  4. Will environmental concerns and potential pollution abatement costs of mining coal for coking purposes raise costs and reduce the competitiveness of China’s NPI production?

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