Asian Metal: Hello, Mr. Zhao. Thank you very much for accepting Asian Metal’s interview. Could you please introduce current production of your company firstly?

Zhao: Yichen has signed strategic cooperation agreement with Shanxi Taiyuan Iron and Steel who dispatches some technicians to cooperate with us in producing high-grade ferronickel. There are two submerged arc furnaces operating, and we are building six submerged arc furnaces with 33,000KVA and rotary kilns which are designed to be put into operation in late October or early November with 40,000tpm of capacity and requiring around 30,000,000tpy of high-grade lateritic nickel ore. We will build another twelve submerged arc furnaces and rotary kilns in phase two which will be commissioning in the end of 2014, and demand for lateritic nickel ore will reach to 70,000,000tpy. We supply most products to Taiyuan Steel and some to Zhangjiagang Posco and China Minmetals. We will improve the industrial chain from nickel ore to stainless steel, including waste residue treatment.

Furthermore, we also invest mines in the Philippines with the plan of building ferronickel smeltery. Nickel ore, which is produced in our Philippine mines in July, can only be used to produce low grade ferronickel, while middle-to-high lateritic nickel ore will be produced in the mine in the future.

Asian Metal: Nickel prices always rise slightly in Q2 when the market sees relative satisfying transactions. However, the market is different this year, and could you please introduce the current market situation of ferronickel?

Zhao: Ferronickel market sees severe oversupply with downward trend due to a combination of significantly reducing nickel prices, sluggish stainless steel market and weak demand from downstream end users this year. Supply of ferronickel decreases as some companies are forced to halt production with strict policies of controlling high energy consumption and high pollution, and purchase prices from stainless mills are lower than costs in view of sluggish market. I believe that supply keeps tight as companies have fewer stocks to sell even though they are willing to conclude deals, and ferronickel market will keep stable in July and may strengthen after October.

Asian Metal: It is said that the export duty of ferronickel will be adjusted, and will domestic ferronickel being exported in large amounts?

Zhao: It is almost impossible that export duty will be adjusted in the near term, and the government discourages exporting ferronickel, thus it is difficult to export the ferroalloy in the near future.

Asian Metal: Many ferronickel producing enterprises cut production or even shut down, as you mentioned, and some emerging enterprises are coming on line and cause increasing capacity of ferronickel. What do you think about this?

Zhao: Ferronickel market is shuffling, and some small enterprises with outdated techniques will be eliminated gradually. Small furnaces are mainly located in Inner Mongolia which is far away from ports, and freight is high due to inconvenient transport of lateritic nickel ore and ferronickel. Additionally, the weather also restricts production in Inner Mongolia as sintering of lateritic nickel ore and production of rotary kiln will be negatively influenced amid too cold winter, so companies are not able to operate for several months in one year. A large amount of emerging ferronickel enterprises in coastal regions like Shandong and Jiangsu with advanced manufacturing techniques, large output and low costs are coming on line and weigh on the capacity of ferronickel. Small enterprises will hardly make profits and may shut down or even be eliminated with prolonged low prices and overcapacity of ferronickel.

Asian Metal: Shandong sees concentrated ferronickel enterprises, and what reasons do you think for this?

Zhao: Most Shandong-based ferronickel smelteries are located in coastal regions which are distributing center of lateritic nickel ore with low freight of raw materials and ferronickel. Another advantage is the climate, and the winter is not too cold in Shandong, thus the production of rotary kilns and sintering of lateritic nickel ore will not be affected. Though electricity prices are as high as RMB0.69/kWh, other cost advantages will balance out high energy costs. A couple of new ferronickel smelteries with advanced techniques have been founded in Shandong, and most of these smelteries produce with rotary kilns which are better for processing lateritic nickel ore with low power consumption of just around 3,000kWh of electricity in producing one ton high grade ferronickel, a half compared with traditional submerged arc furnaces. Moreover, new smelteries can meet standards of environmental protection and gain supports from local governments.

Asian Metal: Around 80% of stainless steel mills produce with nickel pig iron instead of nickel cathodes, and some purchase stainless steel scrap, which will reduce the demand for nickel cathodes and depress nickel prices and eventually influence figures for ferronickel. What do you think about this?

Zhao: Capacity expansion will definitely impact nickel prices, and stainless steel mills will consume less nickel cathodes which will be mainly applied in high-tech, electroplate and battery sectors, and raw materials of stainless steel will also be replaced by nickel pig iron or imported ferronickel. In the long run, nickel prices are unlikely to increase to the previous high levels, and the number will have its own direction. Stainless steel mills only calculate nickel prices in purchasing ferronickel, and figures of ferronickel will have new pricing with iron content being included.

Asian Metal: After shuffling, small ferronickel smelteries will drop off and large enterprises will increase, and what changes will be seen in the cooperation between ferronickel suppliers and stainless steel mills?

Zhao: The commissioning of emerging large-sized ferronickel smelting projects will large impact the market with obvious overcapacity, and some large-scale mills may fixate suppliers with satisfying prices and stable quality to make purchases. Take Taiyuan Steel as example, the company may lock no more than five suppliers in the medium and long term. Taiyuan Steel plans to increase the output of stainless steel with demand for nickel pig iron rising to 120,000-130,000tpm in the coming year from 70,000-80,000tpm currently, and our company will also lift out capacity from 40,000tpm this year to 120,000tpm in the coming year to meet most requirements of Taiyuan Steel as a partner. Such large mills as Taiyuan Steel may reduce procurement from traders or small suppliers, and small enterprises will be eliminated gradually.

Asian Metal: The highest content of nickel in ferronickel is only 10-15% in China, while the percent is higher than 20% for imported ferronickel? Will content be lifted domestically and will high content be advantaged?

Zhao: It is easy to lift the content of nickel in ferronickel to be higher than 20% with improved processes. Most overseas smelteries can easily produce ferronickel with nickel content higher than 20% with higher than 2.2% lateritic nickel ore, while domestic smelteries mainly import nickel ore with lateritic nickel ore 1.8-2.0% which is suitable to produce ferronickel with 10-15% of nickel in view of costs. However, we are able to produce ferronickel with over ferronickel 20% based on current producing techniques. For example, the project of Taiyuan Steel in Burma is producing ferronickel with over ferronickel 20% to supply Taiyuan Steel. Ferronickel 20% or 10% does not have too much difference in producing stainless steel as other raw materials like steel scrap will be added during manufacturing.

Asian Metal: What does your company think about technical improvement which has been the focus of the market with reducing production costs of ferronickel?

Zhao: We cooperate with Shandong University in rotary kiln projects and have made some progresses. We have just won a patent of integrated automotive recovery which is planned to be applied in phase two projects to improve current process of ferronickel productions. Technical improvement is highly valued in the market, thus we apply for the patent to reduce costs for the long-term development as well as benefit protection for the company. Integrated automotive recovery has the advantages of large output, low energy consumption and high sintering quality.

Asian Metal: New policy of exporting lateritic nickel ore from Indonesia is still uncertain. Some enterprises intend to build factories in Indonesia, and China also encourages enterprises to invest overseas nickel resources. What is your plan amid current lateritic nickel ore market?

Zhao: In my opinion, Indonesian government is unlikely to ban raw ore exporting in the short term, and it will not pass up the opportunity of income increase. The country may lift export duty.

Asian Metal: You also mentioned that your company has invested and built smeltery in the Philippines, and what do you think are the advantages of investing mines in the country?

Zhao: The Philippines has better policies for foreign investment with stable political situation than Indonesia. Moreover, the Philippines believes in Catholicism, while Indonesia has more than five of religious faiths, which is complicated. The Philippines is nearer with low ocean freight. However, considering infrastructure of building factories, both countries are backward.

Asian Metal: Ferronickel and lateritic nickel ore markets remain stable despite slumping nickel prices, and what do you think about the market currently or in late Q3?

Zhao: Prices of nickel ore are likely to slide down in the short-term. Figures for nickel ore 1.8%min keep at RMB290-300/t (USD47-49/t) ex port at Rizhao port, and the price may decrease further before October. Despite continuously declining prices, Chinese enterprises will not halt production in Indonesia or the Philippines due to limited lifetime, and enterprises will continue to transport ore back even in losses, so supply of nickel ore will not decrease obviously. However, the possibility of production suspension of mines being invested by foreign enterprises will not influence the market too much, so prices of nickel ore will dip further before October. The price of ferronickel keeps at RMB920/mtu (USD150/mtu) delivered presently, and there is a little room for the price to drop further, thus supply will reduce gradually.

We anticipate that the market will recover after October when Inner Mongolia-based enterprises have to replenish stocks of nickel ore to maintain ferronickel production, and those enterprises have no plan to resume production will wait for until June, 2014. Additionally, the market remains sluggish, and many ferronickel enterprises will have to halt production in August, resulting in recovering fundamentals. Ferronickel market will also recover with the support of improving nickel metal market.

Asian Metal: Thanks again. Wish your company a bright future.