BHP Billiton Limited (ADR) (NYSE:BHP) and Glencore International PLC (OTCMKTS:GLNCY) may suspend or reduce production at their nickel mines in Australia. Both companies have several high-cost mines such as Murrin Murrin and Nickel West that are currently struggling to maintain output. Production cuts are expected to be announced in the next few weeks. This may result in an upswing in nickel prices, as other Australian miners such as Queensland Nickel and Mincor Resources have already cut or stopped production.
According to JP Morgan analysts, the closure of Nickel West will likely result in around $1 billion in shutdown costs. However, this may be a more attractive alternative than facing $1 billion in free cash flow losses for the next three years. Reduced production from these two mines, along with others in the world could lead to a drop of up to 6% in global supply.
Due to oversupply in the market, sufficient inventories, and decreased demand from China, prices for nickel have fallen by 45% since the beginning of 2015 to reach lows not seen since 2003. Other producers such as Russian and Canadian firms are currently protected from production cuts due to cheaper Russian Ruble, and improvements in technology that have significantly reduced costs. Moreover, France has recently pledged its support to the firms operating in New Caledonia. France has a stake in Eramet which recently announced that it would look to cut costs and reduce capital expenditures due to the current market environment.